First a recap on Start Up 2.0. The proposal has a few different provisions of interest to the tech entrepreneur:
- 100% Capital Gain Exclusion for Investments in Small Startup Companies. Investors in qualified small businesses that hold their stock for five years would qualify for a 100% exclusion of any capital gains. That is, any gains from such investments would be tax-free. Generally, to qualify, the small business must be a “C” corporation having $50 million or less in assets which the stock is issued.
- Simplified R&D Tax Credit for Small Startup Companies. This provision creates a targeted research and development tax credit for small startup companies with less than $5 million in annual receipts. These companies would be allowed a 20% R&D credit based on R&D wages. Unlike the traditional credit (with its three alternative calculations), this Startup 2.0 credit is not based on some historical base amount calculation. The credit would be 20 percent of the corporation’s W-2 R&D wages, limited to a maximum of $250,000.
- Conditional Permanent Resident Status for Foreign-Born Residents with an Advanced Degree in Science, Technology, Engineering, or Mathematics. The bill proposes to create a new visa for up to 50,000 foreign students who graduate from an American university with a Master’s of Ph.D. degree in science, technology, engineering, or mathematics. Visa recipients would be granted conditional status contingent upon their remaining actively engaged in a STEM field for five consecutive years. Once conditional status is lifted, the visa holder becomes a permanent legal resident with the option to naturalize.
While there are other provisions of the bill these three items formed the main of the conversation. Representative Dold set the tone by sharing with the audience his perspective as a small business owner and lawmaker. As part of his Main Street Jobs Agenda, Congressman Dold explained how he has joined with members of the Congress on both sides of the aisle to find ways to jump start small and medium sized business growth. In fact, he noted that the Start Up 2.0 Act follows on the heels of reauthorization of the Export Import Bank to spur on American exports; and passage of the Jumpstart Our Business Start-Up Act which encourages innovative "crowd-funding" to help finance new businesses, and is designed, among other things, to make investment rules more oriented toward helping smaller companies gain access to capital.
Following his remarks, I had the pleasure of moderating a panel featuring local businessmen Andrew Hoog of viaForensics, and Jeremie Bacon of Backstop Solutions; as well as Robert Feldstein from New York City Mayor Bloomberg’s office who has launched the Partnership for a New American Economy, a non-partisan organization dedicated to achieving meaningful immigration reform, particularly in the area of STEM.
Andrew Hoog noted that he was particularly interested in the R&D provision of the bill. The existing R&D tax credit is based on the revenues of a firm and has a complicated calculation process. As a consequence, Hoog noted that his firm was not able to take advantage of the credit until a couple of years after the launch of his company, when it started to turn a profit, and that it was quite costly to calculate “backwards” to derive credit. The prospect of an R&D tax credit based on R&D wages is appealing because it would simplify the accounting process and make the credit available earlier in a company’s growth curve, with less transactional cost, thus potentially spurring growth sooner in a companies evolution.
While Hoog saw less specific benefit for his company with regard to the 100% capital gains exclusion, Jeremie Bacon noted that an important beneficiary of this proposal would be venture capital and investment firms. By making resources more available to this segment of the business cycle, he noted that VCs would be more inclined to make early stage investments in tech start-ups, thus enhancing a “virtuous cycle” of growth.
Bacon also shed light on the immigration proposals in the bill. Backstop Solutions has about 49 engineers and a significant proportion of those are foreign born. He explained that going through the current H-1B visa process is costly and time consuming. Now, the company has honed the process so that it costs roughly $4,000 to $6,000 per applicant. He also noted that the difficulty of navigating the H1-B process is one more hurdle to jump over in attracting smart individuals to come work for them. Backstop is competing for talent against peer companies in the United States as well as companies overseas. The proposed new STEM visa category could make it easier for his company and for smaller firms to attract STEM talent.
Robert Feldstein provided a broader perspective on the importance of immigration by noting that five additional jobs are created for every high-skilled visa (h1b) because immigrants often work in R&D and exports. Feldstein also pointed out that there is a meaningful correlation between immigration and innovation. For example, according to the Partnership’s research more than three out of every four patents at the top 10 patent-producing US universities (76%) had at least one foreign-born inventor. These are but a couple of data points developed by this organization that supports the notion that expanding visa categories and encouraging retention of skilled immigrants is not a zero sum game pitting American workers against foreign. Just the opposite is true.
This was a terrific kick-off for the Illinois TechVoice chapter. The hope is to build off this impressive launch to keep local entrepreneurs informed and engaged. Meetings and events to follow!
