House Makes Great Progress on Supporting Growing New Businesses with New Bill

By: Marianne Hudson, ACA Executive Director

Recent progress to the American Innovation Act of 2018 (AKA “tax reform 2.0”) to include a proposal to protect Net Operating Losses (NOLs) of startups has the Angel Capital Association cheering.  ACA, along with the National Venture Capital Association, Biotechnology Innovation Organization and AdvaMed called for Congress to address an unintended consequence of rules blocking “loss trafficking.” The bill was introduced to reform rules that can unintentionally punish startups for attracting investments to support the growth of their companies.  Reform to the existing rules, written in the mid-1980s, will have significant impact on startup companies and their ability to gain full valuation for additional investments and exits.

The Angel Capital Association thanks the lead sponsors of the American Innovation Act of 2018 (H.R. 6756) for introducing legislation aimed at supporting the tax issues of high growth startups.  The bill is in keeping with a “Tax Reform 2.0” plan to help brand new businesses by helping with startup costs and capital.

ACA Executive Director Marianne Hudson said, “We appreciate the leadership of Chairman Kevin Brady, Reps. Erik Paulsen and Vern Buchanan and their colleagues on the House Committee on Ways and Means to support the startups that create considerable jobs and innovation in our country.  This particular bill addresses an unintended consequence of rules for Net Operating Losses on startups, and it will help these high-growth companies build their value as they attract additional capital and are acquired, leading to greater success for the companies and their investors.”

The Net Operating Loss rules addressed in H.R. 6756 were written in the mid-1980s with the goal of preventing “loss trafficking” – the act of acquiring failing businesses as a strategy of using tax losses to offset other unrelated income.  Hudson noted that preventing loss trafficking is important, these rules have a different impact on growing new businesses that attract equity capital.  Most of these companies are in a loss position as they attract new capital from angel and venture capital investors to hire new people and conduct research and development, and the rules are triggered as the new investment rounds change the ownership of the companies.  The new legislation would provide a “safe harbor” for companies less than twelve years old from these otherwise well-intended rules.

“ACA joins the National Venture Capital Association, Biotechnology Innovation Organization and AdvaMed in applauding this legislation,” said Hudson.  “We are especially pleased to see a focus on helping the innovative new companies that spur so much economic growth in America.”