What the tax code changes could mean for TBED activities

Please note: this article is not intended as a comprehensive review of Public Law No. 119-21, nor should our reading of the law be treated as tax or legal advice.

Now that the dust has settled on the federal budget reconciliation package, Public Law No: 119-21, SSTI presents to its Digest readership our look at the legislation from a technology-based economic development (TBED) perspective. The process nuances, potential fiscal impacts, and broad policy changes of the 870-page act have been extensively covered elsewhere, so we won’t rehash those here. Instead, we will focus on a few key highlights of changes to the tax code and what those could mean for TBED activities.

The majority of the new law is focused on federal revenues through tax changes, there are new spending items of note for the TBED community. There is a new provision that funds an artificial intelligence-driven research initiative at federal labs. The law establishes the American Science Cloud and appropriates $150 million to the Department of Energy to use AI to support the development of novel microelectronics and energy technologies from Department of Energy and National Labs data.

Only some of the tax changes in the One Big Beautiful Act, as the new law is also titled, have a clear link to TBED, while others may have an indirect impact, depending on regional economic and industrial characteristics. The areas of the Act that have the most direct link to TBED initiatives are the tax implications for individuals, small businesses, R&D, advanced manufacturing, Opportunity Zones, university-affiliated foundations, corporate giving, New Markets Tax Credits, small business investments, and artificial intelligence.

The Act touches a wide range of personal and business tax issues, primarily by making permanent the 2017 tax cuts that were set to expire Dec. 31, 2025. These changes do not target specific industries or geographies, so the impact on tech-based businesses will likely mirror national business trends. Several provisions related to employee benefits and compensation, however, may have a more immediate, though potentially limited, impact on technology workforce compensation structure.

For example, there are specific changes related to how employers account for paid family leave, increases to the employer-provided childcare credit, and exclusions for certain employer payments of student loans that may influence how tech companies approach employee compensation and benefits. Student loan repayment is a commonly suggested workforce attraction and development strategy for workers with advanced degrees and technical expertise.

Changes to the deduction and amortization of domestic research and development expenses are likely to have a more direct impact on technology-based companies. The changes would allow companies to accelerate how they treat domestic R&D expenses for tax purposes, potentially deducting those expenses in a single year. The net effect of these changes on early-stage companies is an area where initial losses incurred by startups complicate the analysis. Another change relevant to the TBED community is that software development will be eligible to be treated as a research or experimental expenditure. Importantly, some provisions of the updated R&D tax reforms are retroactive to Dec. 31, 2021, with allowances for filing amended returns to align prior tax bills with current law.

The Act expands the Qualified Small Business Stock Gain exclusion, which allows investors in small companies to limit their capital gains tax liability. There are a number of changes, although the limits are generally increased from $10 million to $15 million, and the minimum investment holding period is reduced from five to three years.

Another change relevant to TBED is increasing the Advanced Manufacturing Investment Credit from 25% to 35%. The credit originated in the CHIPS Act and applies to investments in eligible semiconductor manufacturing facilities and equipment.

The Act adjusts the excise tax on the net investment income of foundations linked to private universities. The tax scales with the relative size of the foundation, starting at 1.4% for foundations between $500,000 and $750,000 per student, increasing to 4% between $750,000 and $2 million per student, and topping out at 8% for endowments larger than $2 million per student. There is a specific reference to including royalty income from federally subsidized research in the income calculation, so the change touches tech transfer activities.

There also are changes to deductions for corporate charitable giving, setting a new floor of 1% of taxable income for contributions to be deductible. This change could induce additional corporate giving for corporations close to the 1% threshold and is potentially relevant for TBED organizations working with corporate partners.

The Act extends and makes permanent the New Markets Tax Credit. The New Markets Tax Credit program can benefit growing technology companies in certain locations by attracting capital and investment to low-income areas.

Public Law 119-21 permanently renews and makes significant adjustments to the Opportunity Zone program, with many of the changes aimed at enhancing investment in rural areas. These changes could have an impact on TBED activities and strategies in opportunity zones, particularly in rural areas. The Act has over 30 pages dedicated to Opportunity Zone program changes, which would benefit from a separate analysis to fully understand how the program will be implemented going forward. A future Digest article and possible SSTI webinar will explore the innovation perspective to the new Opportunity Zones.

Understanding the full impact of these changes would require a deeper exploration of individual situations from legal and tax experts. It is also important to consider that tax policy does not exist in a vacuum, and tech companies and investors are tracking a variety of economic and policy issues. How the tech sector and risk capital markets react to these changes, and what the impacts on TBED initiatives are, may not be immediately clear for some time.

This page was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.