The “One Big Beautiful Bill” Act Includes Several Big Tax Policy Changes for Startups

President Trump signed the “One Big Beautiful Bill” Act (OBBBA) into law on Friday, July 4^th following very narrow passage by both the House and Senate earlier in the week.  The House passed the legislation on Thursday by a mostly party-line vote of 218-214 after Senate passage by a vote of 51-50, with Vice President JD Vance breaking the tie.

The Act is indeed large and wide-ranging, with several aspects causing considerable controversy, particularly cuts of nearly $1 trillion to Medicaid and food support programs, as well tax cuts that disproportionately benefit wealthy Americans.  Those aspects notwithstanding, the Act also contains tax policy changes that significantly benefit the nation’s entrepreneurs and innovation community.

Background

In late December of 2024 following President Trump’s re-election, CAE and six other innovation-focused organizations – the Advanced Medical Technology Association, the Angel Capital Association, Carta, Engine, the National Venture Capital Association, and Technology Councils of North America – formed an advocacy coalition called the Innovator Alliance.  Many of the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) – enacted during the first Trump Administration – were set to expire at the end of 2025, and Alliance members knew the incoming Administration would focus on making those provisions permanent, and likely consider other tax policy changes.  In early January, the group launched a website, and on January 8, 2025 sent a letter to President-elect Trump outlining the importance of tax policies that promote and support American entrepreneurship.

Since then, the group has focused on four principal priorities: 1) restoration of first-year expensing of R&D investment, which was changed in by the TCJA; 2) continued and even enhanced favorable tax treatment of qualified small business stock (QSBS); 3) continued favorable treatment of carried interest, which is especially important for emerging fund managers; and, 4) enhanced tax treatment of startups’ net operating losses.

With our Innovator Alliance colleagues, CAE participated in more than a dozen in-person and virtual briefings of key staff of the House Ways and Means Committee and Senate Finance Committee, which are the tax-writing Committees of Congress.  As drafts of the legislation were debated and amended over recent months, prospects for our priorities grew brighter, dimmed for a while, then brightened again.  In the end, we were very successful with regard to our top three priorities.

Restoration of First-Year Expensing of R&D Investments

Since the establishment of Section 174 of the Internal Revenue Code by Congress in 1954, U.S. businesses have been permitted to choose between deducting their research and development (R&D) expenses in the year in which those investments were incurred or amortizing them over at least five years.  The option of first-year expensing promoted innovation by powerfully incentivizing critical investments in research and technological advancement.  Those investments led to countless scientific breakthroughs, powered economic growth, and produced many significant commercial and military advantages for the United States.

But when Congress passed the TCJA in 2017, it changed the tax treatment of R&D in order to partially off-set the revenue impact of reductions in corporate tax rates.  Beginning in tax year 2022, businesses were required to amortize R&D investments over five to fifteen years, dramatically increasing their annual tax liability and disincentivizing innovation generating investments.  The nation’s startups were hit particularly hard by the change, as they tend to invest heavily in developing, testing, and improving their new product or service.

Since 2022, CAE has advocated aggressively for Congress to restore first-year expensing, including many meetings with Congressional staff, writing and organizing a letter on the issue to Congressional leadership signed by 23 other innovation-focused organizations, and publishing an Op/Ed in The Hill.  Our goal was permanent restoration of first-year expensing, with retroactivity back to 2022 when the historical tax treatment was changed.

The version of the legislation passed by the House on May 22^nd only restored first-year expensing through 2029 and did not include retroactivity.  But following additional advocacy by CAE and our Innovator Alliance colleagues, the Senate Finance Committee amended the House bill to make restoration permanent and to include retroactivity back to December 31, 2021 for new and small businesses with gross receipts of $31 million or less.

Qualified Small Business Stock (QSBS)

The Act also includes significant changes to section 1202 of the federal tax code regarding the treatment of gains on holdings of qualified small business stock (QSBS).  Since its enactment in 1993, section 1202 has permitted eligible investors who hold QSBS for five years or more to exclude from federal income tax a portion or all of any gains realized from the sale of the stock.

The OBBBA reduces the required holding period for QSBS benefits, increases the per-issuer dollar cap on excluded gains, and raises the gross assets criterion of businesses whose stock qualifies for QSBS tax treatment.

• Reduced Holding Period: Instead of a flat five-year holding period for full QSBS benefits, the Act introduces a phase-in structure:
  • 50 percent exclusion of any gains on QSBS held for at least three years;
  • 75 percent exclusion of any gains on QSBS held for at least four years; and,
  • 100 percent exclusion of any gains on QSBS held for at least five years.
• Increased Per-Issuer Dollar Cap: The maximum gain that can be excluded per issuer was increased from $10 million to $15 million (indexed for inflation starting in 2027).
• Increased Gross Asset Threshold: The ceiling for companies whose stock qualifies for QSBS treatment was increased from $50 million in aggregate gross assets to $75 million (also indexed for inflation starting in 2027).

These changes apply to QSBS issued or acquired on or after the date of enactment of the final legislation.

Carried Interest

The OBBBA preserves current long-term capital gain treatment of carried interest, which is the share of any investment gains earned by general partners in venture capital, private equity, or hedge funds.  Rolling back or eliminating favorable treatment of carried interest has been considered by Congress for years, and President Trump had indicated his interest in raising rates on carried interest to help pay for other aspects of the OBBBA.  In the end, the legislation preserved current treatment.

CAE and our Innovator Alliance colleagues emphasized to Congress that favorable treatment of carried interest is especially important to emerging fund managers, for whom the standard fee of 2 percent of assets under management is insufficient to make raising and managing small funds economically workable.  Two percent of a $10 million fund, for example, is just $200,000 – not enough to hire staff, cover back-office costs, and compensate fund managers.  For managers of small funds, therefore, participating in any fund gains at favorable tax rates is critical.

We will keep the entrepreneurship community posted on any further developments.  If you have any questions about this report or any other innovation-related issue or policy, please let us know.