The Big Story: Tax package could include key fixes for startup ecosystem
Talk of a potential tax package resurfaced this week, buoying hopes of long-awaited fixes to tax policies essential for the startup ecosystem, like R&D expensing and an expansion to the child tax credit. Congress headed home for the holidays without advancing any tax deal, but these talks have resurfaced as Congress faces a pair of government funding deadlines that could provide the vehicle needed to move the package. Changes to R&D tax treatment has created large, sometimes unexpected tax bills for startups, and restoring the expanded Child Tax Credit (CTC) could open entrepreneurship as a path for more women founders.
Lawmakers from both parties have suggested a willingness to come to an agreement on both R&D expensing and some version of an expanded CTC, and a tax deal containing both efforts would be a significant win for the startup ecosystem. To help offset the cost of the deal, lawmakers are considering a crackdown on the fraud-riddled Employee Retention Credit, and the impending government funding deadlines—the first of which is January 19th—could provide both the impetus and legislative vehicle to get a package over the finish line.
Many startups have faced significant tax bills and a blow to their efforts to conduct R&D after the Tax Cuts and Jobs Act implemented a shift to amortization for R&D expenses from earlier being able to write off those expenses in the same year. Meanwhile for many founders, especially women founders, child care costs serve as one of the most significant barriers to launching and growing a startup. Permanently enhancing the CTC will help founders afford to care for their families while they pursue entrepreneurship. Startup founders have spoken out about the impact of both of these issues, with over 65 startups urging Congress to fix R&D expensing and over 60 women founders calling on Congress to expand the CTC. Lawmakers should act swiftly to address both the child tax credit and R&D expensing—founders and their companies are suffering as a result of prolonged inaction.
Policy Roundup:
Engine, startups underscore importance of immigrants in U.S. startup ecosystem. In late December, Engine stressed the importance of supporting the startup ecosystem when making changes to the H-1B visa program in comments submitted to the U.S. Citizenship and Immigration Services (USCIS) as part of their rulemaking to modernize the program. A coalition of 20 founders and others in the innovation ecosystem also joined us in submitting similar comments, urging USCIS to carefully consider the needs of startups as they finalize their proposed rule. The proposed rule includes some promising provisions, including clarifying that foreign founders with controlling ownership of their companies are eligible for H-1Bs, but it also should be improved because changes to the definition of specialty occupation risk limiting the pool of potential talent available to all companies, including startups. Many of the changes are positive, and the H-1B program is essential for the innovation economy, but policymakers should also work to create new and expanded pathways for foreign founders and talent to join and strengthen our innovation ecosystem.
Biden Administration holds listening sessions following digital trade policy reversal. In late December, the White House hosted a series of listening sessions on its October decision to retreat from longstanding digital trade policy, like support for free data flows and opposition to local storage mandates, which are critical for U.S. startups’ global competitiveness. Data localization measures, for example, cause significant hurdles for startups, elevating barriers to entry creating new costs, and impacting their ability to scale. Immediately following their decision to abandon the positions, Engine called on the administration to reaffirm support for critical digital trade policies for startups.
Lawmakers pressured to extend Internet bill aid. In December, Federal Communications Commission Chairwoman Jessica Rosenworcel called on Congress to fund the Affordable Connectivity Program (ACP) “to help more families get and stay connected to the high-speed internet they need to participate in modern life.” The program helps more than 20 million U.S. households maintain their Internet bills and is set to run out of money by April. Programs like ACP help individuals access the resources they need to participate in the modern economy and gain skills to participate in the innovation ecosystem.
United Kingdom legislation to expand surveillance, undermine encryption. The U.K. government is rushing to expand surveillance laws, quickly moving legislation threatening the ability of companies to implement end-to-end encryption. The legislation builds upon the 2016 Investigatory Powers Act introduced and gives the government expanded, extra-jurisdictional sway over companies’ offerings intended for the UK market. That far-reaching impact, especially when paired with recent legislation like the Online Safety Act, will diminish the attractiveness of the UK market for U.S. startups, otherwise a common first stop for smaller U.S. startups, thanks to common language and culture.
Startup Roundup:
#StartupsEverywhere: Omaha, Nebraska. Retail Aware helps brands, retailers, and their partners measure in-store product displays and shopper behavior data in real time. We talked to Founder and CEO Keith Fix about building a startup in the Midwest outside of a traditional tech hub, data privacy concerns, and the complex difficulties of immigration and visa issues for both startups and their employees.
Startups expansion surges beyond Silicon Valley. This week, The Wall Street Journal examined how post-pandemic changes to the workforce have fueled entrepreneurs to start their own companies, creating almost 1.6 million new businesses through the end of November 2023. The growth in entrepreneurship was particularly strong outside of Silicon Valley, with new business applications up significantly in cities like Atlanta, Ga., Mobile, Ala., and New Orleans, La. Engine has long documented the trend of more startups launching in and capital going to regions outside of the Bay Area and traditional technology hubs that has accelerated post-pandemic. Startups have historically accounted for about one-fifth of new jobs created each year, and Congress should enact legislation to further support the spread and development of startup ecosystems across the U.S.
