What happened?
Last week the Senate’s version of the One Big Beautiful Bill Act (OBBBA) began to take shape, touching policy issues affecting the startup community such as AI, broadband funding and business tax credits. The OBBA is being enacted as part of a process called budget reconciliation, which avoids the filibuster and allows the legislation to pass along party lines. Much of the focus has been addressing expiring provisions from the 2017 Tax Cuts and Jobs Act (TCJA), which overhauled the tax code and helped startups stretch their limited budgets.
In May, the House passed its version of the OBBBA. Over the last two weeks Senate committees have released their draft provisions. Most notably the Senate Finance Committee released its section of the bill, which covers tax, economic development, energy subsidies, and Medicaid. While much of the bill is similar to what was approved by the House, there are some differences between the bills that if passed would need to be reconciled.
Several measures in the Senate Finance Committee’s version of the reconciliation bill are supportive of startups in improving cash flow, attracting talent and raising capital. If passed in both the House and Senate, startups will have several avenues through which to reduce the risks and costs of scaling their ventures.
How does the bill help a startup’s bottom line?
In a highly sought after win for the startup ecosystem, the OBBBA, allows startups to immediately deduct the full cost of U.S.-based research or experimental expenditures starting after 2024. For startups this includes important proof-of-concept activities including, but not limited to, market research, prototyping, software development, and product testing. Small businesses making under $31 million a year can take advantage of the change retroactively, starting after 2021. Additionally, any company that has made R&D expenditures from 2022 to 2024 can accelerate their deductions.
The TCJA switched from allowing businesses to immediately expense R&D to requiring a five year amortization starting in 2022. Under this existing rule, if a startup spends $100,000 on R&D only $20,000 would be tax deductible in the first year. This method of amortization can cause major cash flow problems for an early stage venture with already limited cash on hand. Startups drive innovation, but as a consequence are often initially unprofitable because of all the costs attributed to R&D activities. Not being able to claim the full deduction can act as a barrier to startups hiring talent or getting off the ground all together. The return to immediate R&D expensing recognizes this reality.
Similarly, the Senate version of the bill restores immediate full expensing in the same year for qualifying depreciable business assets. This would include any office equipment, computers or operational tools. Much like immediate R&D expensing, this change helps startups claim valuable deductions during their building phase and frees up vital capital. And while the House bill reinstates immediate R&D expensing for five years, the Senate version makes it permanent.
For startups focused on hardware and manufacturing innovation, the bill also makes permanent the advanced manufacturing credit and expands it from 25 to 30 percent of the qualified investment. Establishing physical manufacturing operations is especially costly, and any avenues of assistance that recognize the high upfront investment innovation demands helps founders and the broader startup ecosystem.
How does the bill encourage investment outside of traditional funding hubs?
The Senate’s reconciliation bill language continues the Opportunity Zone investment incentive framework established under TCJA. Investments made in designated, predominantly low-income census tracts — called Opportunity Zones — are eligible to receive considerable tax breaks. Intended as a means to funnel private capital dollars beyond traditional funding hubs, this policy aids underrepresented founders in attracting investment and may dissuade startups from feeling pressure to relocate to larger tech hubs. In this version, a special emphasis has been made on rural communities with the addition of “Qualified Rural Opportunity Funds,” which offer triple the tax incentives as standard Opportunity Zones.
Opportunity Zones act as meaningful tools for building a more diverse, inclusive, and resilient innovation ecosystem. If passed, startups in these communities would be able to offer more attractive funding opportunities for investors, tap into local talent, and aid in the revitalization of underserved communities.
How does the reconciliation bill help startups compete for talent and investment?
Startups leverage the favorable treatment of Qualified Small Business Stock (QSBS) to attract investors and create more competitive compensation offers for talent. Startups can offer stock in their company to both investors and early employees, and as long as the investor or employee holds that stock for a certain amount of time, they can avoid being taxed when selling the stock. The Senate version of the bill makes QSBS exclusions permanent and allows the exclusions to kick in after three years (50 percent), four years (75 percent), or five years (100 percent). The cap on qualifying stock value would be raised from $10 million to $15 million, boosting an already valuable tool startups use to attract top talent and potential investors.
Competing with the benefit packages of larger companies often puts startups at a disadvantage. Parents in particular are often discouraged from joining the startup ecosystem in favor of more established companies that are able to offer higher salaries to offset rising child care costs. Policies like the Child Tax Credit and Employer Child Care Tax Credit can go a long way in supporting this talent pool. The Child Tax Credit, which was doubled to $2,000 under TCJA, is made permanent. However, a restriction now requires both the guardian and child to provide social security numbers to claim the credit.
On the other side of the equation is the Employer Child Care Tax Credit, which offers an incentive to employers that either offer child care or provide resources and referrals to help employees find child care. The bill makes the credit permanent and raises the maximum to $600,000 with up to 50 percent of costs covered for qualifying small businesses. Both of these measures help support workers faced with the prohibitive costs of child care, making it easier for parents to enter or stay in the startup ecosystem.
How does the bill change reporting requirements for startups and the people who work for them?
Most startups have high — and varying — labor demands, especially in their early growth phase, but are oftentimes unable to bring on full time employees. Therefore, much of the work at this stage is done by contributions from a diverse part time team, usually paid as independent contractors. The Senate’s version of the OBBBA raises the minimum reporting requirement to $2,000 from $600. While this change may seem small, it does lessen the reporting burden on founders that are piecemealing together their labor force and is an attempt to be more aligned with current labor market realities.
What happens next?
Reconciliation is an increasingly important part of the budget process and allows Congress to pass legislation using simple majority in the Senate. However, reconciliation packages usually strive for budget neutrality and provisions are required to have direct budgetary function under the Senate Byrd rule.
This week the Senate Parliamentarian is reviewing the Senate Finance Committee’s section of the bill, and the committee will strike or amend language to address the Parliamentarian’s flags to proceed to a floor vote. Once the Senate has passed their version of the bill, a conference between the House and Senate convenes to reconcile the two bill versions into one finalized text. Both chambers must pass identical versions of the bill before it can be sent to President Donald Trump’s desk for signature.
The President has made it clear that passage of the One Big Beautiful Bill Act is a top priority and made it clear that he expects the bill to be passed and in front of him by July 4th (an ambitious deadline, especially considering the slim majority Republicans have in both the House and Senate). There has been heated contention within the Republican Party over the bill’s proposed cuts to Medicaid and the state-and-local tax (SALT) deduction. As startups continue to operate in an uncertain economic environment, policymakers should consider the vital role that the tax environment plays in their success.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.
