NC startups cheer tax relief passing US House, but Senate outcome remains in doubt

With rare bipartisan support, the U.S. House of Representatives passed legislation Wednesday night that North Carolina startup founders say could help them avert financial disaster.

Titled the Tax Relief for American Families and Workers Act of 2024, the bill delays a new rule within Section 174 of the federal tax code that limits how much companies can deduct from their annual research and development expenses. The change was made during the Trump administration and went into effect at the start of 2022.

For R&D-intensive startups that generate little to no revenue, their grant payments were suddenly counted as income, which resulted in their tax bills rising multiple times higher.

“Having to pay taxes when you don’t have any income is catastrophic for these small companies that literally puts them out of business,” said Eva Garland, a business consultant in Raleigh who has lobbied Congress to address Section 174.

The House bill delays the amortization requirement until the start of 2026. It also retroactively cancels the tax requirement for 2022, giving founders a path to repayment after steeper tax obligations dented or even wiped out their savings.

Garland called this necessary relief.

“It’s not permanent, but it would buy us time through 2025,” she said. “It would at least get us through the election year.”

The Tax Relief for American Families and Workers Act of 2024 passed the House by a vote of 357 to 70. All but one of North Carolina’s 14 House representatives voted for the bill. The only objection was from Rep. Dan Bishop, who is running for state attorney general as a Republican.

The News & Observer reached out to Bishop’s office for comment but has not yet heard back.

Rep. Deborah Ross, a Democrat who represents a large portion of Wake County, celebrated the tax relief bill Wednesday, issuing a statement that the legislation “boosts American innovation and competitiveness — helping to grow local businesses and create new jobs in Research Triangle and beyond,”

Senators Budd and Tillis have reservations

The tax bill next moves to the Senate, where its success is uncertain. Complicating passage is the fact that Section 174 reform is just part of the overall bill, which also increases the child tax credit, includes disaster tax relief, tax benefits for Taiwanese companies, and a low-income housing tax credit.

North Carolina Republican Sens. Thom Tillis and Ted Bud support the R&D expense reform but aren’t yet committed to the overall legislation.

“Senator Budd is currently undecided on the tax package overall, but he is supportive of fixing the Section 174 issue and encouraging R&D in North Carolina,” said Curtis Kalin, deputy communications director for the senator, in an email.

Tillis, who sits on the Senate Finance Committee, worries about paying for the legislation. To cover the expenses, the House bill calls for stricter penalties on the Employee Retention Credit, a COVID-era policy that was meant to help keep workers on payrolls but that has been rife with fraud.

“The employee retention credit was implemented in the CARES Act and did not have a pay-for, so that’s a fake pay-for in my opinion,” Tillis told Roll Call in January. “We got work to do on the child tax credit because it’s too expensive and too much, and it needs to be focused on the people who actually need it, not everybody.”

NC business leaders warn new federal tax rule will harm innovation, reduce growth

‘This is so crazy.’ Tax spike pushes NC researchers to the brink of bankruptcy