NVCA advocates for tax policy that encourages new company formation by focusing on how and where the tax code impacts entrepreneurship and the realities of the entrepreneurial business model.
Why it matters: Startups are a unique business model that do not fit neatly into the definition of large or small businesses, where most business tax reform has been focused.
- Startups normally generate losses while taking multiple rounds of investments to build the business. Proposals such as a corporate rate reduction or small business expensing will have a limited impact on the survival rate of startups, most of which do not have profits (some will be completely pre-revenue) unless and until they achieve some level of success.
- Startups typically operate for years using investment capital to develop a novel product, making the investment environment absolutely critical to entrepreneurship. The U.S. has done a good job sustaining tax policy that encourages patient, long-term investment over the last 35 years and the country has significantly advanced as a result.
Tax policy often overlooks the startup ecosystem. As one of the most powerful economic levers that policymakers have at their disposal, tax policy can foster a healthy and prosperous U.S. startup ecosystem and ensure economic progress in an increasingly competitive global economy.
Background: New businesses are the engine of job creation in the U.S., creating an average of about 3 million new jobs each year and accounting for virtually all net new job creation, according to data from the U.S. Department of Labor and the U.S. Census Bureau.
Implement reforms to encourage new company formation
Tax reform should also be an opportunity to encourage new company creation by changing rules in the tax code that ignore or unintentionally penalize startups.
Research & Development Tax Credit Reform
Make the R&D credit work for startups, where a disproportionate amount of innovation is taking place in the American economy.
Simplify and expand the Qualified Small Business Stock (QSBS) rules so they can function more effectively as an important incentive for investment in early stage startups.
382 Safe Harbor
Protect innovative startups from punitive tax rules that discourage investment in innovation by creating a safe harbor for startups from the Net Operating Loss limitation rules under Section 382.
Stock Options Tax Deferral
Allow startup employees a reasonable period of time to defer paying taxes on exercised stock options
Maintain tax policies that are fundamental to economics of the entrepreneurial ecosystem
Tax reform should avoid increasing taxes on entrepreneurial investment and activity. Increasing taxes on the ecosystem would be a terrible miscalculation at a time when we find ourselves in a global competition to build the next generation of companies.
NVCA will continue to support sensible partnership tax rules that have facilitated the creation and growth of the venture capital industry and the entrepreneurial ecosystem.
Capital Gains Rate and Carried Interest
A globally competitive capital gains rate applicable to carried interest earned by venture capitalists.
Capital Gains Rate Differential
A meaningful differential between the capital gains rate and ordinary income rates to encourage risk investment and entrepreneurship.
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