A bill passed in the U.S. House last week could help startups struggling with research and development expenses.
A section of the Tax Relief for American Families and Workers Act of 2024
that focuses on research spending would allow small businesses to write off research and development expenses. It would also reduce the taxes small businesses pay on experimental expenditures.
“This bill, if it can come into effect, would be incredibly important for small businesses, small biotech businesses, because it would allow for the (Small Business Innovation Research) grant mechanisms, the money that comes in and the equipment that they provide, to be written off in one year,” said Sam McCall, founder of Wilmington biotechnology startup, SeaTox.
The bill passed in the House on Jan. 31 by a margin of 357 to 70. U.S. Rep. Jason Smith from Missouri introduced the bill on Jan. 17 and it's now in the hands of the Senate. However, passage through the Senate is not guaranteed, as the business tax relief is one small part of the bill. It also includes international tax relief, low-income housing tax credits and improvements to the child tax credit.
U.S. Rep. David Rouzer (R-NC) is one of 13 representatives from N.C. who voted to pass the bill. He wrote about the act in his Feb. 6 newsletter.
“This past week, with my support, the House of Representatives passed H.R. 7024, the Tax Relief for American Families and Workers Act. This legislation restores key provisions from the Republican-led 2017 Tax Cuts and Jobs Act to build a stronger economy here at home and increase American competitiveness on the world stage," Rep. Rouzer wrote. "This includes making permanent certain tax provisions from the historic 2017 tax reform legislation which incentivized investment, productivity, and work. I'm proud to support this legislation to reduce the tax burden on hardworking Americans, support our small businesses, and make life more affordable for North Carolinians.”
“This is incredibly important that this pass because it will benefit small businesses, particularly those that don’t have the benefit of investors or deep pockets to be able to pay the taxes,” McCall said.
Startups have been dealing with increased tax bills on research and development expenses, which includes SBIR grants, since the Tax Cuts and Jobs Act of 2017 took effect in 2022.
SBIR grants can be between $100,000 to $200,000, and with the Tax Cuts and Jobs Act, that money is counted as income for the startup, which increases what the founder owns in taxes by a sizable sum, McCall said.
Before this law took hold, startup owners could write off research and development expenses in one year, he said. When the tax rules changed, businesses were required to amortize the cost of equipment over five years.
“But that doesn’t work for small businesses, particularly R&D startups, biotech startups,” McCall said. “Most of the time, startups can’t get investment money, and certainly investors don’t want to turn around and use the money for the tax burden.”
He added that the startups don’t see the returns on the taxes they pay when they receive grant money until five years down the road. By then, many startups have gone out of business.
If the bill passes the Senate and is signed into law by the president, the tax requirements will be pushed off until 2026.