Weekly Policy Update: Advocacy on Congressional Tax and Investment Policies
By: Colorado BioScience Association Date: 03/25/2022
Colorado BioScience Association is watching legislative proposals at the federal level that would be harmful to business. These proposals would have impacts on Qualified Small Business Stock and tax calculations for Research and Development expenses.
Qualified Small Business Stock (QSBS)
The QSBS rule has been an effective tool for promoting investment in startups and early-stage growth companies. This is particularly the case for early-stage and pre-revenue life sciences companies that already face challenges with attracting investors. The rule limits capital gains taxes for founders, employees, and investors in qualified small businesses on the first $10 million in gains derived from qualified company stock. Shares acquired from a secondary sale are ineligible. To qualify, the enterprise (C-Corp) must, among other things, have less than $50 million in assets, 80% of which are used in the active conduct of a qualified business. Lastly, stock owners must hold the stock for at least five years.
The QSBS rule has been in place since 1993 and in 2010 the capital gains exclusion was increased to 100%. Under the current proposal:
- The 100% capital gain exclusion for any sales or exchanges of QSBS occurring after September 13, 2021 would be capped at 50%.
- The exclusion would remain available for individuals with an adjusted gross income of less than $400,000 along with trusts and estates holding QSBS shares.
At the end of October, CBSA signed on to a letter led by BIO to Congressional leadership outlining concerns related to changes with the QSBS. As detailed in the letter, early-stage companies generally cannot pay the same salaries or provide the same benefits as large corporations, and they certainly cannot provide the same job security. QSBS enables early-stage employees to unlock the full value of the equity they have earned in the small businesses they helped build. This incentivizes talented people to work at innovative startups that strive to build a vibrant economic future. CBSA earlier this month signed onto a follow up letter led by AdvaMed Accel again urging Congress to maintain the existing QSBS framework. Read the full letter.
Research and Development
Since 1954, the U.S. tax code has recognized the important role of R&D investments in creating well-paying jobs and spurring innovation by allowing businesses to fully deduct their R&D expenses in the same year they are incurred. As of January 1, 2022, businesses must now amortize or deduct these expenses over a period of years, making R&D more costly to conduct in the U.S.
The inability to immediately write-off R&D expenses would make investments more costly to smaller U.S. medical technology companies or cause them to halt investments altogether. Larger medical technology companies may simply avoid making investments in the U.S. and focus their R&D spending in countries where they can receive a full tax benefit.
Earlier this month, CBSA signed on to a letter led by MDMA and AdvaMed to Congressional leadership urging the passage of the House’s American Innovation and R&D Competitiveness Act and the Senate’s American Innovation and Jobs Act both of which include provisions to permanently repeal the amortization provision. Read the full letter.
CBSA advocates for proposals that strengthen the incentives necessary to sustain innovation in the life sciences and create high-wage, high-value jobs. Whether it is related to trade, intellectual property rights, or tax incentives, we will continue to make the case to policymakers that these sweeping policy efforts will have sustained impacts on our state’s life sciences ecosystem.