Congress closer to resolving R&D and broader tax issues

Topline

• Congress closer to resolving R&D and broader tax issues

• No government shutdown for now as Congress resorts to stopgap funding

• Supreme Court hears case that could weaken administrative authority

• SEC Chair Gensler warns about risks of AI, noting responsibility for AI may rest with the courts

• SEC to hold open meeting on SPAC disclosure rules

Congress closer to resolving R&D and broader tax issues

House and Senate tax-writing committee chairs agreed to a tax package that among other things would resolve the expiring treatment of research and development expensing, a key tax incentive for the innovation ecosystem. It’s a positive step, but the deal is not complete: Factions on both sides are looking to make revisions, which could complicate the path forward. 

R&D background

Since 1954, companies have been allowed to fully deduct R&D expenses associated with product development and improvement under section 174 of the Internal Revenue Code.

Qualifying R&D expenses include:

• Wages and salaries of researchers

• Materials and supplies used in qualified research

• Costs of operating and maintaining research facilities (e.g., rent, utilities, and insurance) 

This tax treatment has promoted innovation by incentivizing critical investments in research and technology, resulting in scientific breakthroughs and significant economic growth over the years. The Tax Cuts and Jobs Act (TCJA) of 2017 changed section 174 by repealing the option to expense R&D. Instead, starting in 2022, companies were required to capitalize those costs and amortize them over five years for domestic research or 15 years for foreign research. 

These changes are impacting businesses of all sizes by dramatically increasing their annual tax burden. However, the nation’s startups and small businesses are hit disproportionately as they tend to invest heavily in developing, testing, and improving their new products or services to drive innovation. 

The Deal: Congress’ tax deal centers on two partisan provisions:  

• Restarting key business tax provisions: The proposal would retroactively revive three expired business tax provisions from the TCJA: full expensing of R&D, net interest expensing, and accelerated bonus depreciation. This is the major priority for Republicans.

• Expansion of the Child Tax Credit (CTC): The proposed laddered expansion of the CTC would increase the amount of refundable CTC from $1,600 per child to $1,800 in tax year 2023, $1,900 in tax year 2024, and $2,000 in tax year 2025. Expanding the CTC is a priority for Democrats.

For a summary of the tax framework, see here.  

What’s next: Markup on the package began in the House on January 18. Tax committee leaders are anxious to move the bill through their respective chambers of Congress. That said, factions on both sides have signaled they want to alter aspects of the package, creating friction points that could stop its advancement. Interested parties will need to stay engaged.

Carta’s position: Carta supports the rollback of R&D amortization and, as a result, the broader tax package. We signed a letter encouraging policymakers to restore R&D expensing by underscoring its importance to the venture-backed startup ecosystem and will continue to advocate until the deal is done. 

No government shutdown for now as Congress resorts to stopgap funding

Lofty hopes for a long-term spending deal dissipated this week as Congress resorted to another short-term measure that funds the government into March. The deal retains the two-tier structure of the previous stopgap, with funding now set to expire in two tranches on March 1 and March 8.

Supreme Court hears case that could weaken administrative authority

This week, the Supreme Court heard oral arguments in a case that could have major implications on the authority of regulatory agencies. At issue is the 1984 Chevron doctrine, which gives deference to the agencies’ interpretations of the laws they administer and enforce. Based on questioning, the conservative justices seemed inclined to limit or overturn the precedent set in the 1984 case. 

For those who have not re-watched Schoolhouse Rock! in some years: Congress passes laws, but those laws can be general and in some cases ambiguous. Regulatory agencies, such as the SEC, interpret the law to draft regulations that determine how those laws are enforced. The judicial branch has traditionally been deferential to regulators through the lens of the Chevron doctrine, but as of late, courts have viewed regulatory authority with more scrutiny. 

Why it matters: If Chevron is overturned or further limited, the power of federal agencies will be significantly curtailed. Such a move would have major implications for the SEC, which is already being challenged in court for exceeding its legal authority in adopting a number of rules, including the recently adopted private fund adviser rules. Any decision that strikes or limits Chevron could invite further legal challenges of agency rules that are not based on explicit congressional authority. 

SEC Chair Gensler warns about risks of AI, noting responsibility for AI may rest with the courts

Artificial intelligence still appears to be top of mind for SEC Chair Gensler in the new year. Gensler commented this week that responsibility for AI systems may become a matter for the courts as regulation stalls due to a lack of clarity surrounding what drives an AI model’s algorithms. He also offered a continued warning of AI’s threat to financial stability — hinting at the role that the SEC can play in helping to stem the threat.

Gensler’s comments accompany the SEC’s recent actions related to AI:

• In December, the SEC’s examinations division sent requests for information on AI-related topics to several investment advisers, part of a process known as a sweep.

• Last July, the SEC proposed rules to require investment professionals to assess whether the use of AI or predictive data analytics poses any conflict of interest, and if so, to eliminate or neutralize those conflicts. These efforts have been widely criticized by the industry and policymakers as overly broad and unworkable. 

Virtual event with FinCEN - Corporate Transparency Act: What business owners need to know

The Corporate Transparency Act (CTA) requires the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) to collect beneficial ownership information (BOI) from millions of entities, mainly small businesses and startups. The new CTA filing requirements began January 1, 2024, and business entities subject to the rules face significant new reporting and recordkeeping obligations.

Join us on January 30 at 10 a.m. PT/ 1 p.m. ET for an exclusive webinar with FinCEN’s Senior Regulations Advisor, David King, along with Carta’s VP and Chief Compliance Officer Rachel Sapers and Policy Director Amy Miller to explore an in-depth review of the CTA’s reporting requirements. 

Register here and submit your questions about CTA filing ahead of the virtual event to have them answered live.

News to know

• SEC expected to finalize SPAC disclosure rules. Next week, the SEC is holding an open meeting to consider whether to adopt new rules and amendments to disclosures in initial public offerings by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions). 

• House Republicans to introduce bill boosting SEC oversight. Top Republicans on the House Financial Services Committee plan to introduce a bill this week that would give lawmakers more power over the SEC by requiring reports to Congress on the impact of its regulations.

• Brown lines up proposals on money laundering in crypto. In an interview this week, Chair Brown noted that the Senate Banking Committee will likely unveil a proposal in the coming weeks and that he is hoping the legislation will be bipartisan in nature. 

• JPMorgan to pay $18M over alleged whistleblower-protection violations. A JPMorgan Chase subsidiary will pay $18 million to the Securities and Exchange Commission to settle charges it violated whistleblower protections rules, one of the largest fines to date by the regulator under the rule.  

• CFPB proposes overdraft fee limits for large banks. The Consumer Financial Protection Bureau on Wednesday proposed a rule that would sharply limit overdraft charges at the largest banks and credit unions in the United States. Comments on the rule are due on or before April 1, 2024

• House Republicans quietly shop new text of crypto overhaul. Republicans on the House Financial Services and Agriculture Committees are quietly shopping revised text of landmark legislation that would dictate how the SEC and CFTC oversee cryptocurrencies. Notably, the authors also added a bill from Rep. Tom Emmer that would make it harder for the SEC to classify certain digital assets as securities.

• IRS announces that businesses do not have to report certain transactions involving digital assets until regulations are issued. The Infrastructure Investment and Jobs Act revised the rules that require taxpayers that are engaged in a trade or business to report cash receipts over $10,000 by considering digital assets to be cash. This provision requires that Treasury and the IRS issue regulations before it goes into effect.

Upcoming events

• Brookings Institute: Investing in all of America: The Biden-Harris administration’s place-based approach - A conversation with National Economic Advisor Lael Brainard - January 22 at 10:00 a.m. / 1:00 p.m. ET

• American Enterprise Institute: Soft Landing, Hard Landing, or Financial Crisis? - January 24 at 10:15 a.m. PT / 1:15 p.m. ET

• European Commission: Roundtable On Shortening The Settlement Cycle In The EU - January 25 at 5:00 a.m. PT / 8:00 a.m. ET

• Peterson Institute for Economics: Next steps for the Basel Committee on Banking Supervision - January 25 at 6:00 a.m. PT / 9:00 a.m. ET

• Carta event: Increasing Regulatory Scrutiny and What It Means for PE - January 25 at 12:00 p.m. PT / 3:00 p.m. ET

• FTC Tech Summit - January 25 at 9 a.m. PT / 12:00 p.m. ET

• Carta event: Corporate Transparency Act: What Business Owners Need to Know - January 30 at 10:00 a.m. PT / 1:00 p.m. ET

• Carta Innovators Summit - February 13 at 10 a.m. PT / 1:00 p.m. ET

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