Startup companies and their investors can breathe a little easier.  The tax reform bill working its way through the legislative process is likely to include provisions that, if passed into law, could help early stage companies.

Background

In November 2017 the House passed its tax reform bill, H.R. 1 – also known as the Tax Cuts and Jobs Act.  It received significant media attention for, among other things, lowering the corporate tax rate to 20%.  This stands to benefit for-profit corporations of all sizes.

Yet to members of the startup community, the bill shows something perhaps even more interesting – a focus on promoting innovation and entrepreneurship.  New companies often do not have revenues, and their investors take significant risks.  Because of these characteristics, these companies arguably deserve tax treatment that is different from that of established businesses.

House Majority Leader Kevin McCarthy, along with the vast majority of his fellow House Republicans, supported the bill.  He said in a November 1 Financial Times piece that “we need a dynamic tax code that promotes the competition, risk-taking and innovation that is the foundation of the 21st-century economy.”[1]

 Some specific parts of the bill that would benefit startups:

  • The bill preserves the gain exclusion for sale or disposition of “qualified small business stock” (Section 1202 of the Internal Revenue Code), which encourages people to invest in early stage companies. The U.S. Senate has passed its own version of the bill, which likewise preserves such exclusion for gains on qualified small business stock.
  • The bill preserves the research and development tax credit (R&D Tax Credit), although a conflict with the corporate Alternative Minimum Tax provisions in the Senate’s bill will need to be addressed.[2]
    • The R&D Tax Credit lets a company redirect money from federal taxes to fund research and development expenditures (including salaries, supplies, contract research, and computer leasing).
    • It is important to many new and high-growth companies, as well as more established companies.
  • The bill includes provisions making it easier for early stage companies to attract new employees with incentive equity and other deferred compensation.
    • Currently, startups often offer restricted stock units or stock options instead of cash compensation to employees and other contractors. When the restricted stock units vest or when nonqualified stock options are exercised, for example, the holder is sometimes liable for taxes, even if the stock can’t be sold to pay the taxes.  This reduces the utility of incentive equity.
    • The House bill would defer tax payment until the equity can be sold, or would provide an extended timeframe in which to pay the tax bill.
    • Enhancing the attractiveness of incentive equity would help startups compete against established companies in attracting workers.
    • By contrast, the Senate bill includes different and harsher provisions regarding such forms of compensation.[3]

What’s Next

Negotiators from the House and Senate are now working on a final version of a tax bill.  Stay tuned to see what comes out of the House and Senate efforts to reconcile the two bills.

[1]       https://kevinmccarthy.house.gov/media-center/in-the-news/op-ed-tax-reform-will-boost-innovation-and-entrepreneurship

[2]       https://www.wsj.com/articles/passage-of-senate-tax-bill-puts-r-d-tax-credit-in-doubt-1512328243

[3]       https://corpgov.law.harvard.edu/2017/11/26/comparison-of-house-and-senate-tax-cuts-and-job-acts-bills/

Middle Market employers in Silicon Valley need to be familiar not only with the state minimum wage, but also any local minimum wage laws that may be applicable to them, and on July 1, a few cities, including San Jose, San Francisco and Emeryville, had new minimum wages go into effect:

City Minimum Wage
San Francisco $14 per hour
San Jose $12 per hour
Emeryville $14 per hour for employers with 55 or fewer employees; $15.20 per hour with 56 or more employees

California’s minimum wage rose earlier this year to $10.50 per hour for employers with 26 or more employees.  In recent years, however, many cities and counties have enacted their own minimum wage rules. Compliance with local ordinances can be complicated, because some ordinances apply only to businesses that are based in the city in question, while others apply to all employees who work some minimum number of hours in the city.

What Should Employers Do Now? Continue Reading Some Silicon Valley Cities Increased Minimum Wage on July 1

Employers in California, especially those in the Middle Market, are all too familiar with the tidal wave of wage and hour litigation they have confronted over the past decade plus – claims alleging misclassification, unpaid overtime, meal period and rest break violations, and pay stub violations, to name just a few.  A new decision from the California Supreme Court addresses claims based on long-ignored Labor Code statutes regarding days of rest.  Although the decision is favorable for employers in many respects, it nevertheless could foretell another species of wage and hour claim on the horizon.  In the wake of this decision, employers should consider adopting policies on days of rest and should be careful to avoid requiring non-exempt employees to work seven days within a single work week unless they work no more than 30 hours during the week and no more than six hours in any single day. Continue Reading California Supreme Court Clarifies Rules Regarding Days of Rest

In the wake of a recent California Court of Appeals decision, the Vaquero case, employers who pay employees on a commission basis should assure that they comply with the following rules in order to avoid potential liability: Continue Reading Rules Regarding Commission Compensation Just Got More Complicated

Last fall, California voters approved Proposition 64, legalizing the recreational use of marijuana for persons 21 and older.  In the wake of Proposition 64’s passage, many employers have been puzzled about the impact of the new law upon their human resources practices.  The good news is that Proposition 64 should not have a substantial effect on employers.

Our firm recently sent out a client alert that goes into greater detail about what the new law does and doesn’t do. Continue Reading Dazed and Confused by Prop 64? Here’s What Employers Need to Know

It appears that 2016 saw a surprising and dramatic drop in patent litigation filings. As reported by Richard Lloyd of IAM Magazine,[1] recent studies released by the intellectual property firms Unified Patents[2] and RPX confirmed patent litigation filings were down almost 25% in 2016 from the prior year, the lowest volume of cases since 2011. Paradoxically, however, the risk of a patent lawsuit being brought against middle market companies may be higher than before.

Continue Reading New Patent Litigation Risk to Middle Market Companies

Take an extra bow if you own or run a Middle Market company. 

2016 was a great year for the Middle Market. Reports on company performance in 2016 are surfacing, and show the Middle Market continued to be a turbocharged engine driving economic growth in the U.S. The National Center for the Middle Market compiled 20 full quarters of data through Q4 2016 in its recently-released Middle Market Indicator (MMI).[1] Annual revenue growth in the Middle Market in 2016 was 6.9%, far above the S&P 500 rate of 4.4%. The Middle Market led hiring growth at 5.4%, exceeding its five-year historic average rate of 3.4%, and blasting ahead of large businesses at 2.4%, and small businesses at 1.4%.

The MMI estimates that Middle Market revenue in 2016 increased at almost double the rate of national GDP growth. Already employing approximately 47.9 million people, the Middle Market created three out of every five net new private sector jobs in 2016. That’s 60% of net new jobs last year, for a sector comprised of about 200,000 companies and making up about 1/3 of the private sector GDP.

What drives the Middle Market success? Organic growth fueled by upside opportunity not always available to large corporations or within the reach of resource-limited small companies.  Innovation to stock pipelines of new products and services.  MMI reports that 40% of Middle Market companies introduced a new product or service in 2016. Unlike large public companies, private companies making up most of the Middle Market can more easily exercise conservative fiscal management with low debt and high reinvestment or savings rates, and cautious hiring practices.  And a five-year run of overall domestic economic growth, low interest rates, cheap energy, and almost no inflation to drive up the cost of materials and wages, certainly set a perfect stage for great performance.

Will there be an encore performance for the middle market in 2017?

Continue Reading A 2017 Encore?