RESEARCH TRIANGLE PARK — Startups and innovation teams are talking about changes to Section 174, specifically the new tax rule that, in part, taxes grant money as income, raising the tax burden of companies with research and development (R&D) expenses.
As reported in the N&O on Monday, the tax burden is a big problem for many of North Carolina’s tech- and innovation-focused companies.
WRAL TechWire spoke with Olalah Njenga, a Raleigh-based policy advocate for small businesses, about the new tax rule. Like many NC business leaders, Njenga opposes the policy.
“Start-up firms, especially tech and pharma, are the innovators and disruptors this country needs to challenge convention and bring forth bold discoveries. How unfortunate it is that the short-sightedness of bureaucrats often cripples progress,” Njenga told TechWire.
NC Commerce Secretary warns of fallout
The requirement concerning research and experimentation expenditures could slow innovation in the state, North Carolina’s Department of Commerce secretary stated in a recent letter to North Carolina Congressional delegation members.
Sec. Machelle Baker Sanders in the letter urged delegation members to advocate for the deferment of the Internal Revenue Code section 174 amortization requirement focused on R&E.
Njenga currently serves on the Executive Committee of the NCWorks Commission and is a Board Member with the DC-based National Small Business Association (NSBA), a federal nonpartisan organization advocating for US small-business owners.
She told TechWire that these changes to Section 174 have “far-reaching externalities for the small business economy.”
Section 174 has existed since 1954, but during the Trump administration, a new rule was passed that changed how businesses can deduct R&D expenses.
Before, businesses could deduct R&D expenses immediately, which provided a bigger upfront tax break. But, effective as of Jan 1, 2022, the rule change requires the amortization of R&D expenses —meaning the tax break is spread out over a number of years.
Many who are opposed to the change have argued that startups and small businesses need the earlier tax break in order to help reduce their “taxable income” during those early few years before revenue is strong.
“Every small business, whether established or emerging, lives by four critical words, ‘cash flow’ and ‘taxable income,'” said Njenga.