Tax Reform

Silicon Valley Startups Struggle Amid Massive Tax Bills

Silicon Valley Startups Struggle Amid Massive Tax Bills

Tech startups in Silicon Valley and around the U.S. are struggling as they face massive IRS tax bills. 

The issue comes after Capitol Hill lawmakers failed to extend a tax provision that allows for the full expensing of research and development (R&D) costs under Section 174 of the federal tax code. The provision, which impacts qualified research activities as defined by the IRS, could have been included in President Biden's Inflation Reduction Act but was ultimately scrapped. 

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Credit: Steve Proehl/Getty Images

This was a disappointment to both lawmakers and major corporations that had lobbied for the extension of the tax measure. In fact, tech companies were considered to be among the biggest losers after the Inflation Reduction Act was passed.

NBC reported that the smallest software developers with under a dozen employees are facing some of the toughest times. This change to the tax code is also greatly impacting larger venture capital-backed firms that are still sitting on valuations from pre-2022.

Startups, in particular, are being forced to seek out loans as banks tighten-down on lending and venture capital firms are giving out less funding than they have in years. NBC's team noted that, while many software developers are expected to find a way to survive this year, their continued survival will become an issue if Section 174 is not addressed by Congress. 

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Credit: Maskot/Getty Images

If you're wondering why tech companies have been hit so hard by this change to the tax code, it all comes down to talent. Software developers earn an average of just over $120,000 a year, with top talent commanding well over $150,000 annually.

Until the 2022 tax year, companies could fully expense their programmers' salaries as R&D rather than amortizing them over a period of time.

If you want to get involved with small software companies' fight on Capitol Hill, visit SSB Alliance online.

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Credit: Luis Alvarez/Getty Images

This group, which is currently comprised of over 600 people in the tech industry, calls the current state of Section 174 "an existential threat to small software businesses." 

What do you think about not extending the R&D tax measure?

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Rebekah Barton

Rebekah Barton

Rebekah's search engine optimization career began completely by accident as a college student. Over the course of her career so far, she has "grown up" with the SEO industry, from writing content while juggling classes to managing her own teams of writers and overseeing SEO strategy in subsequent roles. She is excited to bring her passion for high-quality content to CountingWorks, Inc.

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