What happened?
Today, the House successfully passed the One Big Beautiful Bill Act (OBBBA), following the bill’s narrow passage in the Senate on Tuesday, with Vice President Vance casting the tie breaking vote. The bill covers a variety of issues including Medicaid, broadband, energy subsidies and business tax credits. Much of the focus is on 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 and over the last two weeks Senate committees made changes to what would become the final text of the bill. Most notable for startups is the Senate Finance Committee’s section of the bill, which includes measures supportive of startups in improving cash flow, attracting talent and raising capital.
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 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.
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 reconciliation bill 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 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 per child under TCJA, is made permanent and increased to $2,200 starting in 2025. 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 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?
The President made it clear that the One Big Beautiful Bill Act was a top priority and expected that the bill would be passed and in front of him by July 4th. Even at the outset this was an ambitious deadline given the slim majority Republicans have in both the House and Senate. As the reconciliation process got underway the deadline seemed even less likely given the contention within the Republican Party over the bill’s cuts to Medicaid and the state-and-local tax (SALT) deduction.
Reconciliation is an increasingly important part of the budget process and allows Congress to pass legislation using simple majority in the Senate. Republicans on the hill were able to use this to their advantage to narrowly pass a sweeping tax package that extends many of TCJA’s pro-innovation tax deductions, while making considerable cuts to other parts of the budget. Since both chambers have now passed identical versions of the bill it will be sent to President Donald Trump’s desk for signature—just making the deadline.
The reconciliation bill is yet another reminder of the impact tax policy has on the health of America’s innovation ecosystem. Policies like immediate R&D expensing are not just “nice-to-haves”, for startups they can be the difference between scaling or shutting down. Startups need a consistent, pro-innovation policy environment to survive, thrive and grow the economy. If Policymakers want to keep encouraging the mechanisms of innovation they need to continue prioritizing policies that make it easier for startups to launch, access capital and attract talent.
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.
