Before you kick off July 4th activities, the Carta Policy Team is coming to you with a special update: Congress passed H.R. 1, the One Big, Beautiful Bill Act, which included key policy wins for the innovation ecosystem.
It’s official: Congress passed H.R. 1, sending key pillars of Trump’s second-term agenda to the president’s desk for signature. This wide-ranging legislation permanently extends most of the 2017 tax cuts that were set to expire at the end of the year, in addition to other policy considerations. But our focus has been on tax policy that drives capital and talent to the innovation ecosystem. Through engagement, Carta and its coalition partners—the Innovator Alliance—were able to deliver key policy victories to bolster the ecosystem despite fiscal pressures, competing priorities, and a contentious political environment.
QSBS: Protected, and expanded
Up until now, Section 1202 of the tax code has allowed qualified small business stock (QSBS) holders—founders, employees, and investors—to exclude capital gains if shares are held for five years. This important incentive drives capital and talent to the startup ecosystem, incentivizing investors and employees to support early-stage companies. Despite its importance, QSBS came under pressure as a way to help offset the cost of the broader bill.
Carta and our coalition partners not only protected this policy, but expanded it. The new bill expands QSBS eligibility to more companies by raising the asset cap from $50M to $75M, increasing the individual benefit cap from $10M to $15M, and phasing in the benefit, allowing holders to receive the benefit of QSBS earlier (50% exclusion for 3-year holding period, 75% exclusion for 4-year holding period, 100% for 5-year holding period). More QSBS-eligible companies drives more capital flows and talent to the ecosystem, which leads to more innovation and growth.
R&D: Full and immediate expensing restored—permanently
Since 2022, businesses have been required to capitalize and amortize R&D costs over five years. We have been pushing to restore full and immediate expensing, allowing companies to deduct the cost in the year it was incurred. The original House provision restored this change on a temporary basis, but through advocacy, Carta, the Innovator Alliance, and other stakeholders were able to push the Senate to make it permanent, providing much needed clarity and certainty for companies, as well as apply the adjustment retroactively for small businesses. These changes will free up more capital for companies by reducing their tax obligation and incentivize investment in innovation.
Maintaining carried interest tax treatment
Despite opposition—including from President Trump himself—efforts to eliminate the favorable tax treatment for carried interest were not successful. A shift to tax carry at ordinary income rates as opposed to long-term capital gains rates would have struck at the fundamentals of fund economics, and emerging managers would have been disproportionately impacted. Preserving the existing tax treatment of carry aligns compensation and performance, and bolsters emerging and regional managers who broaden the reach of capital to more communities
Engagement matters. Policy is infrastructure, and Carta built a policy team to drive the policy infrastructure to bolster the innovation economy and the private capital ecosystem. Through advocacy and sustained engagement, we educated policymakers on both sides of the aisle, leveraged data, and pulled together a broader stakeholder community to drive tax policy and make the case for the private capital ecosystem—the economic and innovation engine of this nation. We were able to secure these impactful wins for the innovation ecosystem, and engagement made the difference.
Stay tuned for more resources on how to navigate and benefit from these new changes. In the meantime, the Carta Policy Team will continue to push for a policy infrastructure that bolsters and broadens the private capital ecosystem. Reach out to policy@carta.com if you have ideas on what to engage in these efforts.
We hope you have a happy Independence Day, and we’ll be back next week with our regular Policy Weekly newsletter.
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