Economic Impact of Tax Proposals Affecting Research-Intensive Start-Up Businesses and Qualified Small Business Companies

Posted: July 1, 2013 - 12:37 / CSBI / Reports

The United States offers several tax incentives to encourage spending on research and development (R&D). Research-intensive start-up companies and their owners, however, are frequently unable to make effective use of these tax incentives. Start-up companies organized as C corporations generate net operating loss carry-forwards because they are in their prerevenue phase of development and do not have taxable income to offset. Investors in start-up companies organized as pass-through entities are often unable to use the losses generated in the pre-revenue phase of development because the passive activity loss rules generally permit such losses to offset passive income only (which many investors do not have) or delay the use of the losses. Research-intensive start-ups often spend nearly a decade or more investing in a new technology or product prior to commercialization. Start-ups need to raise a great deal of capital to fund their investments and typically do so through several rounds of financing from external investors. During this pre-revenue phase neither the start-up company nor investors in the start-up company can use the tax incentives generated by their R&D investments.