On January 13 U.S. House Rep. Vern Buchanan (R-FL) introduced The American Innovation Act, H.R. 368 (record found here) to encourage innovation in the private sector. Although support for innovation takes on many forms, legislative tools can be among the most effective because they are uniquely able to create substantial, direct, and durable financial incentives to companies small and large to encourage investment in innovation. They also help to define and give surety to the landscape that investors and other stakeholders rely upon when evaluating the commitment of resources as well.
What does H.R. 368 propose?
We’ve included most of the minutia further below but perhaps the key ‘headlines’ are that it proposes the following amendments to the Internal Revenue Code of 1986:
- A quadrupling the amount of 195 start-up costs small business owners may deduct from their federal income taxes, raising it from $5,000 to $20,000; and
- An increase in the threshold for tax deductions from $50,000 to $120,000 for 195 start-up expenditures.
While not insignificant, it is probably fair to say that H.R. 368’s benefits are primarily focused on encouraging innovators at the individual and/or small team level who have ambitions to mature them and bring them to market. Both (1) and (2) above have the effect of de-risking a first ‘bootstrap’ investment and, as does another provision in The Bill allowing for those expenditures to be deducted in the event of liquidation as well.
More detail:
H.R. 368 is comprised of 2 substantive sections (excluding §1; the title):
- §2 – ‘Simplification and expansion of deduction for start-up and organizational expenditures; and
- §3 – ‘Preservation of start-up net operating losses and tax credits after ownership change.
§2 – Simplification and expansion of deduction for start-up and organizational expenditures – includes the following provisions, all of which propose either amendments or additions to IRC 1986 §195:
- Allows for a deduction equal to the lesser of either:
A. The aggregate amount of start-up and organizational expenditures paid or incurred by the business; or
B. $20,000 (reduced by the amount by which such aggregate amount exceeds $120,000).
The remainder of these start-up expenditures can be charged to the capital account and allowed as an amortization deduction.
And, relevantly, an inflation adjustment provision applying the standard COLA to both the $20,000 and $120,000 amounts.
- Allows for the deduction of any start-up and organizational expenditures paid or incurred by a partnership or corporation should it be completely liquidated.
This section (§C) also includes a provision allowing for the deduction of the same start-up and organizational expenditures as applied to the disposition of a trade or business; subject to some additional terms providing for these expenses to be scaled to the portion of the business they apply to.
- Fully defines Organizational Expenditures
- Clarifies how certain disregarded entities are to be treated for the purposes of applying H.R. 368
- States that for partnerships and S Corporations, the deduction election shall be applied at the entity level.
§3 – Proposed changes to §382(d):
In general, §382 limits net operating loss carryforwards in addition to certain built-in losses following an ownership change. H.R. 368 seeks to create the following exceptions to this general rule:
- An exception for start-up losses
- An exception to the current treatment of excess credits for the use of start-up excess credits. Would permit the reduction of any unused general business credit by the start-up excess credit amount for a given start-up period taxable year.
Time will tell if H.R. 368 ultimately becomes law and/or to what extent it is amended along the way. Any updates will be posted in this article or posted as stand-alone content if warranted.
We will continue to spotlight U.S. legislation at the federal and state levels that seeks to grow innovation or otherwise encourages invention. While we do our best to avoid any commentary pertaining to the potential passage of any specific piece of legislation, we do strive to provide our audience with an in-depth understanding of the vehicles lawmakers are utilizing to shape U.S. policy toward innovation.
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