Generally speaking, if you’re paying a lot in taxes, that means you’re bringing in a lot of money.
So, while that money leaving your account might be slightly bittersweet, it is merely a footnote on an otherwise cheery circumstance.
And for companies or individuals that are not bringing in money, well, they are largely spared from this practice.
This is a favorable outcome for startups, many of which are navigating lean times in hopes of one day seeing black on the balance sheet.
That said, there is a necessary expense for many startups that now falls under the purview of the IRS.
And this change to how startups manage their balance sheets could have a substantial impact on the prospects of businesses seeking capital – and those already in your portfolio…
The Tax Cuts and Jobs Act (TCJA) passed in 2017, and it made some substantial changes to the taxing practices for individuals and businesses.
One such change will now officially be in effect next April, as 2022 marks the first year where the money companies spend on research and development (R&D) will not be tax deductible.
It goes without saying this has a big impact on startups, many of which dedicate a substantial percentage of their overall budget to R&D.
After all, to bring new technologies to market, they must be rigorously tested and refined. This change likely won’t alter that reality; however, it could turn it into a more high-stakes proposition.
Now that these expenses will be subject to taxes, R&D can no longer be a vague endeavor without a defined timeline. Money spent on R&D that produces wrong answers – previously valuable in its own right – now brings with it a slightly negative taste.
Unfortunately, the solution for startups isn’t simply to nix all R&D spend.
There would never be breakthroughs in the scientific, medical, or technological fields without it.
But these higher stakes could add increased uncertainty to the prospects of startups venturing into industries that require substantial R&D.
While that doesn’t mean investors should clam up and refrain from exploring such opportunities, it adds another required layer of due diligence.
And be sure to keep your eyes on the headlines come tax season – there may just be some startup casualties as a result of this change.
The A+E Network Deal Research Team