By Rep. Erik Paulsen (R-MN)
September 14, 2018
As the House Ways and Means Committee moved forward on more updates to our tax code this week, many components are getting well-deserved attention: making the tax cuts for middle income families permanent, spurring retirement savings, and making it easier to pay down student loan debt, to name a few.
There’s one component I’ve worked on specifically that will make it much easier for entrepreneurs and small business startups to survive and thrive. Startups are a crucial source of innovation and job growth in our economy, particularly in Minnesota.
But in recent years, startup formations have slowed: Between 1977 and 2007 the economy added nearly 120,000 net new businesses each year. However, since 2008 the economy as added only about 2,000 new businesses per year on average.
Included in Tax Reform 2.0 is a provision that will help reverse that. Fair warning: this is a little in the weeds, but bear with me.
Existing tax law now allows companies to carry forward their losses for tax purposes — essentially, losses incurred in one year can be used in future years when the firm is profitable to lessen its tax liability.
Called Net Operating Losses (NOLs), they’re especially important to capital-intensive startups in industries like medical devices and biotech — big job-supporting industries here in Minnesota. A start-up company creating the next life-saving drug or device, the newest app, or a technological breakthrough will often operate for years without bringing a product to market or turning a profit. These firms often go ten years or more without being profitable, or even having any revenue at all. Their early years are spent plowing money into R&D, equipment and investment.
Reducing their future tax bill when they finally become profitable makes it more worth the initial big investment. It goes a long way in helping small firms survive the first lean years as they struggle to get off the ground.
But the rules governing NOLs were written back in the 1980’s, and they weren’t written with a startup’s funding model in mind.
If a startup news new investors for more capital — pretty common among biotech and medical device startups — they run afoul of these rules, and get hit with a big tax penalty down the road as a result.
It’s a problem we discussed at a Joint Economic Committee hearing I chaired this summer, as experts in innovation and startup growth testified on how the rules discouraged startups from investing in their own growth.
One of the measures we’re considering in the Ways and Means Committee today addresses this. It gives startups more flexibility to attract capital in the first three years of their existence.
Here’s the bottom line: I want to make it easier and more attractive for an entrepreneur to take the leap and start his or her own firm.
This reform helps foster a friendlier atmosphere for our innovators in order to allow startups to base their decision-making on the success of the ideas and market focus, rather than tax considerations.
It allows startups to attract the capital they need to survive until they’re able to become profitable. The end result will be more entrepreneurship, more innovation, and more jobs for Minnesota families.