Last week, a bipartisan group of four U.S. Senators – Sen. Marco Rubio (R-FL), Sen. Jerry Moran (R-KS), Sen. Mark Warner (D-VA), and Sen. Chris Coons (D-DE) – introduced a bill titled “The Start-up Act 2.0”. The legislation is designed to address perceived difficulties facing early-stage “STEM” (Science, Technology, Engineering & Mathematics”) based companies. The legislation addresses access to human capital and financial capital. For human capital, the legislation proposes changes to Visa rules for foreign nationals seeking to start businesses in the US or pursue STEM jobs after completing a master’s or PhD program in the US.
Of most interest to tax professionals, the legislation further proposes the creation of a “targeted” R&D Credit, which would allow companies with less than five years of operations and five million or less in revenues to apply R&D Credits against “employee taxes.” This proposal addresses a long-standing problem with the Federal R&D Credit – since few early-stage companies incur federal tax liabilities, the Federal R&D Credit provides little-to-no value. Under this proposal, early-stage STEM-based companies would be able to recover cash more quickly via the R&D Credit by applying the credits against payroll taxes instead, as opposed to simply carrying the credits forward to potentially apply against future federal income tax liabilities. The proposed payroll tax offset appears to be modeled after similar provisions implemented by various states to help early-stage technology companies without any income tax liability to utilize R&D Credits.
While this legislation is in the very early stages, and it is unclear what chance it stands of passing during an election year, we will be sure to provide timely updates on this and any other tax proposals discussed during the 2012 cycle.