The federal government is simultaneously investing in my startup and crippling our business with little-known tax code provisions.  Only Congress can save us

The federal government is simultaneously investing in my startup and crippling our business with little-known tax code provisions. Only Congress can save us

The federal government is simultaneously investing in my startup and crippling our business with little-known tax code provisions.  Only Congress can save us

Rep. Elise Stefanik, R-New York, US House Speaker Mike Johnson, R-Louisiana, and Tom Emmer, R-Minnesota, from left, during a press conference on Jan. 30. Jason Smith said he expects a vote this week on a bipartisan measure that would combine business tax credits with expanding the child tax credit. Al Drago – Bloomberg – Getty Images

A provision in the tax code threatens hundreds of early-stage research firms. Fortunately, Congress finally seems ready to tackle the problem. But lawmakers will have to act quickly to save startups like mine.

The dilemma stems from a seemingly innocuous provision of the Tax Cuts and Jobs Act of 2017, which among other things amends Section 174 of the tax code. Previously, this section allowed businesses to deduct the full cost of research and development (R&D) expenses for one year.

However, starting in 2022, the new tax law changed this long-standing practice and began requiring companies to spread deductions over five years. This effectively increased the annual cost of conducting scientific research, as companies could not claim full R&D deductions in the year they actually spent the money.

For small startups like mine, especially those receiving research grants from the federal government, change poses an existential threat to the business. Here’s why.

The company I now help lead, Cellf BIO, was founded in 2014 based on groundbreaking work in regenerative medicine. Since then, we have developed a bioengineered sphincter muscle that can be grown from patients’ own cells and then implanted back into their bodies to treat their incontinence. Our treatment can help millions of Americans who suffer from this debilitating and quality-of-life-altering condition.

With the help of significant federal grant money, we were able to begin Phase 1 clinical trials in 2023. We are making great progress and have successfully achieved a major milestone in the first human implantation of the BioSphincter. But even in the best-case scenario, there is a long way to go before gaining market approval from the FDA and starting to generate revenue.

We relied on grants from the Small Business Administration (SBA) and the National Institutes of Health’s Small Business Innovation Research (SBIR) to support our research.

This SBA grant program serves as seed funding for promising startups that have not yet raised venture capital investment. And it proved to be very successful. 23andMe, the most recognized name in genetic testing, originally received SBIR funding.

These federal grant programs, intended only for research expenses, have always been treated as taxable income. Until 2022, this was not an issue or obstacle for research startups, as firms could simply deduct the full cost of their R&D against an equivalent amount of grant income, leaving them with no net tax liability.

In other words, the previous status quo ensured that promising startups were not penalized for winning government grants.

But now, because of the spending shift, they are there is was punished. And it was disproportionately punished. Our small firm with less than five employees faces a six-figure tax bill under the new rule. And because we don’t have an FDA-approved product yet, we don’t have sales revenue. Currently, and like many other similarly situated research startups, our income and funding stream is almost entirely grant-based.

Government research agencies believe in our vision and are helping us make it a reality with critical grant funding. But paradoxically, the IRS wants this money back. And new grant money is not allowed to be used to pay these taxes.

So far we have managed to survive and our technology is ready for outside investment. Many other startups are not so lucky. Some are just weeks away from the runway.

Lawmakers have realized how hard this would hit small, research-based companies, and now they finally seem ready to do something about it. House and Senate negotiators recently announced a deal that would once again allow full spending for research as standard, among other reforms.

The clock is ticking for Congress to act. The relevance of this issue cannot be underestimated. Jobs, small businesses and tomorrow’s life-changing innovations are on the line.

Rayana Marker is the Chief Operating Officer of Cellf BIO LLC.

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