Silicon Valley is pushing revival of game-changing tax benefit for startups
Silicon Valley is pushing senators to follow the House's lead in reviving a favorable tax benefit that disappeared several years ago.
Why it matters: This could change the math for a slew of startups, and even Big Tech companies.
The big picture: U.S. companies currently are unable to fully deduct many software development and other R&D costs, including certain employee salaries, from their taxable income.
That's because of a change made to Section 174 of the tax code during the 2017 tax bill negotiations, in order to make the budgetary impact of tax cuts more politically palatable. It became effective in 2022.
It requires that such costs be amortized over five years, rather than taken in the year the costs are incurred — much like a one-time capital outlay that depreciates, even though compensation expenses tend to be repeated annually.
Zoom in: Startups tend to be unprofitable, which should mean that they don't pay federal tax.
But that got flipped on its head with the Section 174 change, since many of a startup's costs now get applied to future taxes. In short, it can make unprofitable companies look profitable for tax purposes.
According to a recent survey by fintech upstart Mercury, which was shared exclusively with Axios, 73% of respondents say that their companies have had a negative financial impact from the 2022 change. Some 44% of respondents said it forced operational changes, including canceled projects and layoffs.
How it works: The House bill would allow for full expensing in the same year that the costs were incurred, but would not apply that change retroactively to 2022.
A proposal from the Senate Finance Committee would make the change to Section 174 retroactive to 2022 for small companies and allow acceleration of remaining deductions for larger companies.
Driving the news: More than 2,300 individuals recently signed a letter that was circulated on the Hacker News site run by startup incubator Y Combinator, asking the Senate to prioritize the retroactivity carveout.
They included employees of OpenAI, Airbnb, Spotify, and Redfin.
By the numbers: According to the Congressional Budget Office, the House provision — without retroactivity — would add $118 billion to the deficit over the next decade.
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