It seems like Washington lawmakers can agree on very little these days, and that may be contributing to some economic uncertainty. But amid the political back-and-forth over the federal budget, a bipartisan plan has emerged to strengthen the engine of U.S. economic growth – the innovative entrepreneur.
Legislation introduced by Sen. Chris Coons, a Delaware Democrat, and backed by some influential Republicans, including Sen. Marco Rubio of Florida, would give innovative startup companies a chance to take advantage of the successful Research and Development (R&D) tax credit.
It may seem like startup companies should already be able to qualify for the R&D tax credit.
Unfortunately, the reality is many clean energy, information technology, biotech, and other innovative young companies are not helped by the R&D tax credit, even though they invest heavily in research and development.
The problem is that the R&D tax credit can only be taken against income taxes. Few startups make enough profit to pay income taxes, which would allow them to take full advantage of the R&D tax credit.
These companies, however, do pay other business taxes, especially as they hire new workers. Indeed the employer side of payroll taxes, which fund Social Security and Medicare, can be a huge expense for struggling startup companies.
That’s why the proposed legislation, called the Startup Innovation Credit Act of 2013 (SICA), would allow young startup companies to apply the R&D tax credit to their employment taxes as well as their income taxes. Social Security and Medicare trust funds would be made whole by transferring funds from general revenues.
The idea is a simple, yet effective way to encourage American entrepreneurs and fuel what historically has been a powerful engine of U.S. economic growth, job creation and global economic dominance. Startup companies would be able to keep more cash to expand their business and hire new workers.
Why does helping startups matter? One word – jobs. A 2010 NBER study found that when it comes to creating new jobs, the younger the company, the more jobs they create, regardless of size. That’s what SICA does — targeting for the first time the R&D tax credit for startups.
Happily, this big bang for the economy and jobs comes at a small buck. SICA will cost the federal treasury about $160 million a year, a relative drop in the bucket compared to the overall $9 billion to $10 billion annual cost of the R&D tax credit.
While SICA will be a godsend to startups – the sad reality is that thousands of small and medium Florida businesses that currently qualify for the R&D tax credit aren’t taking advantage of this biggest of tax benefits.
These Florida businesses are leaving tens of millions of dollars on the table now.
The big reason that Florida companies aren’t taking advantage of the R&D tax credit is self-censorship – too many business owners think the R&D tax credit is just for the folks at Cape Canaveral.
Nonsense. You don’t need to be sending people to space to get the R&D tax credit, and it is available for a huge range of industries – manufacturing, food processing, architects, engineers, computer software, etc., and the R&D tax credit is for applied science not just basic science.
SICA will provide a great opportunity for jobs and startups tomorrow. Florida businesses taking advantage of the current R&D tax credit can be a big benefit for today.
Dean Zerbe is alliantgroup’s National Managing Director based in Washington D.C. Prior to joining alliantgroup, he was Senior Tax Counsel to the U.S. Senate Committee on Finance. During his tenure, he was intimately involved with nearly every major piece of tax legislation signed into law, including the 2001 and 2003 tax reconciliation bills and the JOBS bill in 2004 (corporate tax reform).