US tax laws punish new wave of profitable startups

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U.S. lawmakers are currently addressing complications stemming from a 2017 amendment to the nation’s tax laws.

Under the previous system, a company generating $1.5 million in revenue with $1 million in R&D costs would be taxed on a $500,000 profit. However, the revised law now permits only a fifth of R&D expenses to be deducted each year, leading to a higher taxable income. This modification has particularly burdened startups with substantial tax liabilities.

Bootstrapped companies, which often reach profitability quicker, are finding this change especially challenging. Conversely, venture-backed startups, usually not yet profitable, are less immediately impacted but are adjusting their financial strategies, including slowing hiring processes due to tightened budgets.

This tax law revision is also influencing major corporations with international R&D operations. In 2022, CFOs from leading firms such as Ford and Netflix lobbied Congress to overturn this amendment.

There is bipartisan support in Congress to tackle this issue. The proposed Tax Relief for American Families and Workers Act of 2024 aims to postpone the implementation of Section 174 until January 1, 2026, with retroactive application. The legislative journey for this proposal is still in its early stages, and its final outcome is yet to be determined.

Sources include: Axios


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