Blog /Policy Weekly 02 02 24
Tax package clears the House with R&D expensing

Tax package clears the House with R&D expensing

Author: The Carta Policy Team
|
Read time:  7 minutes
Published date:  February 2, 2024
|
Updated date:  February 2, 2024
Fate of the tax package remains uncertain in the Senate.
Request a demo

Topline

  • Tax package clears the House with R&D, but faces obstacles in the Senate

  • Court to hear arguments in lawsuit to vacate SEC’s private fund adviser rules

  • House Republicans amend text of crypto bill

  • Delaware court rejects Elon Musk’s pay package

Tax package clears the House with R&D, but faces obstacles in the Senate

In an uncommon show of unity, the House passed the bipartisan tax package by a strong 357-70 vote this week, providing the support that many hoped would spur the Senate to quickly take up the bill. 

The deal was not modified before passage, so it contains the same provisions as when it advanced through committee earlier in January. Most notably for our readers, the package includes a retroactive revival of three key business tax provisions:

  • Full expensing of R&D: Allows taxpayers to deduct rather than amortize domestic research and development costs through tax year 2025.

  • Accelerated bonus depreciation: Allows businesses to immediately write off 100% of the cost of certain property (placed in service in tax years 2023 through 2025) in the first year it was purchased.

  • Net interest expensing: Increases the limitation to allow greater business interest deductions for certain taxpayers. 

The tax package also raises the maximum amount a taxpayer may expense for depreciable business assets (under section 179) from $1.16 million to $1.29 million in 2023, and expands the child tax credit (CTC) annually through 2025, when it will reach $2,000 per child. Other components include expanded affordable housing credits, an increase in the Forms 1099 reporting threshold, and a moratorium on amended employee retention tax credit claims for 2020 or 2021.

What’s next: In the Senate, the package must now compete with immigration reform and foreign aid spending for members’ attention and floor time. The chamber is also set to take a two-week break in mid-February, which both puts pressure on lawmakers to act and risks halting the package’s momentum. 

While passage in the Senate next week is not impossible, Senate Republicans’ persistent concerns with the CTC expansion are another obstacle. If they force a markup or make any changes to the package, it may even delay final consideration into March. Election politics are also creeping in; some Republicans have publicly raised concerns that the tax deal could bolster Biden’s re-election bid—and a second Biden administration would be far less receptive to the bigger tax package lawmakers are already eyeing for 2025.

Call to action: Carta sent a letter to Senate leadership in support of restoring full R&D expensing. Join the effort by contacting your U.S. Senators to let them know that R&D matters to the innovation community. Download the email template here.

Fifth Circuit to hear arguments on private fund adviser rules

A three-judge panel for the Fifth Circuit Court of Appeals is set to hear oral arguments on February 5 in a case that will determine the fate of the SEC’s private fund adviser rules. A group of trade associations representing the private funds industry filed suit to vacate the rules on the basis that the SEC lacked the authority to promulgate the rules, failed to follow proper rulemaking procedures, and that the rules were otherwise “arbitrary, capricious, an abuse of discretion, and contrary to law.” 

Why it matters: While softened from the original proposal, the private fund adviser rules will fundamentally change how the private equity and venture capital industries are regulated. If the court sides with the SEC, it could bolster future efforts to impose additional regulations on private fund advisers.

If the court sides with industry, the rules could be vacated or sent back to the agency to remedy. The judicial branch has traditionally been deferential to regulators, though this posture has been shifting. For example, the Fifth Circuit recently found the SEC’s stock buyback rule to be “arbitrary and capricious” and sent the rule back to the agency to cure the defects. The SEC will almost certainly appeal a negative ruling that could impact the SEC’s authority to regulate even beyond the private funds space. 

What’s next: The court is expected to make its ruling in May. Any appeal would likely extend beyond the date the rules are intended to take effect. Given the implementation efforts and process updates compliance will require, a prudent course of action is to assume the rules stand and be prepared to comply. 

House Republicans amend text of crypto bill and consider legislative path forward

Representative French Hill, Chairman of the Subcommittee on Digital Assets, Financial Technology and Inclusion, said this week that the revised text of House Republicans’ cryptocurrency overhaul includes language requiring safeguards against money laundering. The revised bill addresses issues such as insider trading and whistleblower protections, reflecting concerns raised by House Agriculture and Financial Services Committee members during July markups.

Why it matters: The spot Bitcoin ETP approval earlier this month has reinvigorated the conversation around crypto legislation. The House is preparing for a vote in the coming months, but the timing is fluid as legislating has become more difficult in the House. Unless there is significant bipartisan buy-in or the provision is attached to a must-pass bill, movement will be difficult. Adding AML provisions could help bolster Dem support, which has been a focus of crypto legislation in the Senate.

Recently, CFTC Chair Benham observed that the need for legislation has only increased with the regulatory approval of spot bitcoin ETPs, as many consumers may mistake the technical approval of a product with actual regulatory oversight of the cash commodity digital assets. And any further erosion of the SEC’s authority to regulate crypto by the courts could encourage more support from Democrats. 

What’s $56B between friends, er, I mean shareholders

A Delaware judge struck down the compensation package Tesla’s board and shareholders granted CEO Elon Musk, calling into question not merely the money, but corporate governance standards. In 2018, Tesla’s board agreed to an incentive compensation plan that would grant Musk approximately $56 billion in tranches of equity options if the company achieved certain operational milestones, including an increase in market cap from approximately $60B to $650B. These milestones were ultimately achieved.  A shareholder, however, objected, calling into question the compensation package based on Musk’s controlling interest and the board’s (lack of) independence. The Delaware Chancery agreed this dynamic allowed them to review the executive compensation package, and—unfortunately for Musk—also rescind it. Musk will likely appeal (and potentially reincorporate in the state of Texas).

Why it matters: This may lead to companies further formalizing an already (in most cases) formal process to bolster corporate governance and further inoculate against shareholder suits, but do not expect a massive revamp of executive compensation. But whether you focus on the question of which state to incorporate in, most public companies will not face such a problem—and almost no private companies will, as such shareholder lawsuits are less likely.

News to know 

  • Lawsuit challenges new California climate disclosures. A coalition of business organizations led by the U.S. Chamber of Commerce and American Farm Bureau Federation have filed to block the implementation of California’s newly enacted corporate climate disclosure laws. The complaint was filed in the U.S. District Court for the Central District of California and alleges that the statutes would compel businesses to file “costly, burdensome, and politically fraught statements.” Notably, the new laws go farther than the framework contemplated at the federal level by the SEC, particularly as it relates to the disclosure of Scope 3 emissions.

  • SBA announces growth accelerator competition. The SBA will accept applications for its 2024 Growth Accelerator Fund Competition until Feb. 16. Selected applicants will be awarded $50,000 to $200,000 to advance R&D efforts. The agency is working to foster the national innovation ecosystem and improve outcomes for STEM/R&D-focused entrepreneurs and small businesses, among other goals. 

  • Hill discusses next steps for Financial Services AI working group. Rep. French Hill noted that the House Financial Services Committee's working group on artificial intelligence will begin soliciting feedback from regulators and the private sector before holding hearings this summer.

  • Biden administration expands small businesses’ access to federal contracts. The White House announced actions to better support small businesses in the federal contracting process. In service of this goal, the Small Business Administration (SBA) is rolling out improvements to its technical assistance program, and the Office of Management and Budget issued new guidance for agencies on small businesses seeking high use federal contracts. 

  • OCC proposes changes to bank merger rules. Under newly proposed rules, qualifying bank merger applications would no longer automatically be approved if the OCC fails to act on the application within a certain window. The agency is attempting to boost transparency in the merger review process in response to industry criticisms and in the wake of the collapses of SVB and other banks last year.

  • Crypto-friendly lawmakers look to overturn SEC digital assets guidance. Sen. Cynthia Lummis and Reps. Wiley Nickel and Mike Flood plan to introduce a resolution that would use the Congressional Review Act to overturn SEC guidance requiring banks to include customers’ cryptocurrency assets on their balance sheets. Additionally, Federal Reserve Chair Jerome Powell and acting Comptroller of the Currency Michael Hsu voiced concerns in letters to Congress this week over the SEC's proposed changes to how investment advisers should handle crypto, real estate and other assets.

Upcoming events

Sign up below to receive Carta’s Policy Weekly Brief:

All product names, logos, and brands are property of their respective owners in the U.S. and other countries, and are used for identification purposes only. Use of these names, logos, and brands does not imply affiliation or endorsement. ©2024 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.

The Carta Policy Team
Author: The Carta Policy Team
Carta’s Policy Team aims to connect the policymaking community and venture ecosystem to build an ownership economy and advance policies that support private companies, their employees, and their investors.