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Building products and businesses that people love. Believe that transparency and incentive alignment are at the center of the most meaningful business model innovations that will define our future and create real value for all stakeholders.
Founded in 2019, Neo.Tax is a Series A startup that is educating and democratizing the ability to understand / optimize the tax strategy and planning for companies.
How does someone become VP of Finance and Capital Markets at Ramp, the finance automation platform helping over 13,000 businesses save time and money? “Right place, right time,” Alex Song says. “It can look like everything was deliberate, but I kind of got lucky with this opportunity.” If you believe that, we have a bridge to sell you…Read More
How does someone become VP of Finance and Capital Markets at Ramp, the finance automation platform helping over 13,000 businesses save time and money? “Right place, right time,” Alex Song says. “It can look like everything was deliberate, but I kind of got lucky with this opportunity.” If you believe that, we have a bridge to sell you…
How does someone become VP of Finance and Capital Markets at Ramp, the finance automation platform helping over 13,000 businesses save time and money? “Right place, right time,” Alex Song says. “It can look like everything was deliberate, but I kind of got lucky with this opportunity.” If you believe that, we have a bridge to sell you…
In reality, Alex rode a double major from Stanford and an MBA from Harvard into a series of positions where his unique brand of precision, accuracy, and academic rigor allowed him to thrive. His decade in the investment world taught him valuable tools that he now uses at Ramp as an operator. Most of all, the unforgiving natures of the public markets instilled one especially valuable lesson. “Across every job I've had in the investment world, there is a respect for rigor and hard work,” he says. “If you're intelligent and you have the aptitude, you're resourceful and you work hard, you should be able to get to the answer, whatever the answer may be.”
After a few years at BlackRock and Morgan Stanley, Alex made the move to Bain Capital, where he worked as an investment analyst. Bain is based in Boston, far from Wall Street and its sales culture. “You weren't in the flow of things in New York City, where you have to contend with brokers calling you up and inundating you with all sorts of ideas,” he says. Instead, Alex had time in the office to dive deep into research, working through data to identify good investment opportunities. “I really liked the sheer academic rigor of that particular job. It was a large organization run by academically-oriented people, who were deeply thoughtful,” he says.
Alex left Bain to pursue his MBA from Harvard and took a job at Crayhill Capital Management after graduating. The firm had just been founded by two portfolio managers from Magnetar, which is a $30 billion, well-established, 20-year-old hedge fund. He chose the firm because he would be the first employee at the burgeoning company. It was exciting to get in on the ground floor; he loved the startup energy.
“That experience taught me two things. One: I’m drawn to more entrepreneurial experiences. And two: there’s real tangible value in entrepreneurial grit,” he says. “To succeed at a startup, you can't just be an investment manager; you have to build a business. I love the business-building component.”
He stayed at Crayhill for almost four years, and more than any other job, that was the one that most prepared him for his role at Ramp. “I joined Crayhill as the first finance hire, and wore many different hats while also being an investor,” he says. “When I first started, I had a specific set of mandates, but at a startup, the reality is: you also have to pay attention to the business-building stuff. You have to build a team, be able to communicate effectively, and be able to be a mentor and a friend to the people around you.”
A decade into his career, Alex began to have the entrepreneurial itch to help build a business again. He was working at Sculptor Capital by then and had begun searching for the next opportunity. Always the analytic thinker, Alex realized that hedge funds were dwarfed in relative GDP share by companies on the operator side. “On top of that, accelerated personal and professional growth also mattered,” he says.
In July 2020, when he joined Ramp, the company was barely a year old. Alex arrived with a mandate to build out a capital markets program and a strategy around the balance sheet. His years on the buy side gave him specific insight into how Ramp’s business should operate and how they should manage working capital. But his other important role was to bring Ramp’s financial reporting in-house.
Alex had honed his entrepreneurial skills in his years at Crayhill and began to build a finance team at Ramp. Accounting was an important first step, and he knew he needed to create a dynamic finance operation. “As a leader, hiring is integral. There was probably one point when I was probably spending more than 50% of my time recruiting, interviewing, and sourcing candidates,” he says.
But finding the right candidate is only the first step in team building. “I certainly place a lot of emphasis on nourishing and mentoring new talent,” Alex says.
Over his three years at Ramp, Alex has grown the finance team to 13 people — they are divided between strategic finance, FP&A, accounting, payroll, and capital markets.
Alex recommends a book called The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. “The main thesis is that your job as a CEO or a management team is capital allocation and thinking through how to efficiently allocate capital,” he says. “Ultimately, that's the role that finance plays: as a startup, you are constantly making a series of short-term and long-term bets.”
Some companies lean towards instant ROI plays like Facebook ad buys, while others invest in hiring engineers for projects that may not ship for several quarters and may not monetize for multiple years. “The question really is, if you're trying to maximize long-term value for your stakeholders, what is the right decision there?” he says. “If you think about it, that capital allocation exercise is an investment decision. So, having the lens of an investor in an operating role is a valuable combined hybrid view.”
For any company, capital-allocation decisions are paramount, but it’s especially important for a rapidly growing startup like Ramp, which more than doubled its revenue run rate in the first six months of 2022 and doubled headcount YoY. “It's kind of like chaos theory, where any initial bump can have unintended consequences years down the line. We want to make sure that we are curating and course-correcting constantly,” he says.
That’s why Alex stresses that good reporting is table stakes for a growing business. “And I don't mean just accounting. Accounting is essential, but you also need good business intelligence, good internal reporting, and good metrics,” he says. “If you can't collect and measure good data, you can't make good decisions.”
At Ramp, he’s built a financial team obsessed with creating and leveraging clean, unbiased data. His years in investing demonstrated how advantageous good data can be. It’s helped Ramp grow into an $8 billion company in under three years. “In the hedge-fund industry, when you are collecting data, sourcing data, or buying data, it has to be statistically significant and it has to be accurate and unbiased. Those are the table stakes; you just need mastery over statistics,” Alex says. “I find that, by and large, most people, most of the time, work with very biased data sets and they don't even know it. They think they're making good decisions, but most of the time they're not.”
Hedge funds taught him the value of hard work and getting to an answer. He’s brought that same ethic to Ramp. “If you have questions that you want answers to, there's always going to be an answer,” he says. “In almost every other industry, you can just say, ‘Well, this data just isn't available’ or ‘I don't know who to ask for that’ or ‘that data probably doesn't exist.’ But in the hedge-fund industry, uniquely, there's a lot less respect for the status quo and a lot more respect for just sheer grit and hard work. If the data set doesn't exist, create it, or go buy it, or go partner with subject-matter experts and create that data together. The public market is unforgiving.”
March 7, 2023
1 min read
In the first of our CF0to1 series, we spoke with Mercury's VP of Finance Daniel Kang, a member of Neo.Tax's CFO Advisory Board. His career has taken him from banking to private equity to tech giant to fintech startups and has overlapped with some of the most fascinating companies and business minds in the space. “It's kind of weird but there's a point where you feel like, ‘Man, all my life experiences have led me to this point.’”
Log onto LinkedIn or head to the business section of any bookstore and you’ll find an endless well of stories about the path to CEO. But the road taken to CFO is much less discussed. I’ve always been fascinated by the way finance leaders within companies progress through their careers and how that trail delivers insights into the way finance can be a strategic tool for a business.
For the first in our CF0to1 series, I spoke with Daniel Kang, VP of Finance at Mercury, the company more than 100,000 startups trust for banking. His career has taken him from banking to private equity to tech giant to fintech startups and has overlapped with some of the most fascinating companies and business minds in the space.
“During high school, my dream was to go work for the U.N. but then I read this book by Thomas Friedman called The World Is Flat and talked to a bunch of people who said, ‘Hey, actually, if you work for a business, look at all the positive impacts you can make,’ and my path changed,” Mercury VP of Finance Daniel Kang says. “I knew nothing about business or what I wanted to do within it. Business is such an abstract term, right?”
But Kang followed the vagaries of life in business to NYU, where he was deluged with young people convinced that a life in banking was the dream. Even by his early 20s, Kang was pretty sure he’d be on another path — while classmates wrestled for summer internships on Wall Street, he took a position with Pencils of Promise, the nonprofit that builds schools in Africa. Still, the realities of the world dragged him into banking; his degree wasn’t cheap. “I was like, ‘Crap, I have to get a proper job. I have all these student loans to pay back,’” Kang says. “So, I kind of got suckered into doing banking; the thing I’d told myself I wouldn't do.”
Two years at Bank of America led Kang to a job at Vista Equity Partners, where associates were thrown right into the deep end. “In management presentations, you’re grilling CEOs, talking to people who would have been your boss's boss when you were on the banking side, and talking with them about raising finances,” Kang says. “I was being thrown into situations where, as a 24-year-old, it's really easy to feel uncomfortable.”
Kang thrived in the discomfort — he learned he could hold his own during high-level discussions with executives at the portfolio company. Most of all, he realized he had a passion and a unique talent for problem-solving. As a student, he’d been drawn to philosophy before landing on the business path. “The largest impact of philosophy is the ability to dig deep into a problem, think about it from multiple angles, and try to come to a good opinion about a path forward,” he says. That skillset served him in PE dealmaking, but also in charting his own path.
Kang left Vista when he found himself, being in San Francisco, wanting to work with more innovative tech companies that were changing the world around him versus ones that made good buyout candidates. So, he decided to jump ship, and he picked the perfect time to do it. It was 2014. Uber, Airbnb, and Square were all still private, in their Series B, C, or D stages. “There was a lot of excitement about this new wave of tech,” he says. “I started looking around and Square really spoke to me.”
What drew Kang to Square was a personal connection: his parents had run dry cleaners when he was growing up and he was inspired by Square’s mission to make the lives of small business owners like his parents easier and better. He joined the finance and strategy team a couple years before the IPO — the company was small enough that he was allowed to wear a lot of hats, which was perfect for Kang. “This was the first time that I worked with people from very different disciplines from me where everyone thought about problems through extremely different lenses,” he says. “I partnered closely with our payments team, our Square Capital team, and then also everything that our CFO was supporting. So, like risk, but also random stuff like helping our facilities team with lunch budgets.”
After three years, Kang being Kang went to then-CFO Sarah Friar and asked if he could switch to the accounting side. “It was less about, ‘Hey, I want to be a CFO in the future,’” he says. “It was actually much more so, ‘Hey, I'm working on the finance team. I know one aspect of it decently well. But there's this whole other side, on the accounting side, that I was curious about.’” People scratched their heads when they heard Kang was moving from the more glamorous strategic finance side to a junior role in accounting. But he’d heard the same questions when he left Vista for Square, so he trusted his gut. Luckily, he had a boss in Friar who was fully supportive — so, he spent a year as a revenue accountant. “I'm so happy I did,” he says. “For me, it's never been about role, title, and compensation. For me, it just comes down to the fact that I just want to learn stuff and want to be a master of the field I'm operating in.”
After the IPO, Square grew and changed — for people on the finance side, the move from private to public alters the tenor of the work completely. Kang had learned a lot at Square, especially “that customer-oriented is the most important way to think about a problem, rather than purely from a finance lens.” But he decided he was ready to move again. This time, to somewhere much smaller. “I was really itching for that experience of building something from 0 to 1 or 1 to 2,” he says.
Ethan Bloch, the founder and CEO of Digit, approached Kang and asked him to come on. Kang was again drawn to the idea by his personal history. To create a product that made financial wellness effortless and non-judgmental spoke to him. “I come from an immigrant family. Managing personal finances and our household finance was a very important thing that was top of mind for us all the time,” he says.
But in his first month, he started to worry he’d left Square too soon. “It was not a calculated move. Digit was super early. They were doing probably like 2 million ARR at the time. 30 people,” he says. “It was a gamble but ended up being the best decision I could've made in the experiences gained and relationships built.”
By the time they sold the company in December 2021, Digit had grown exponentially: “We had scaled up revenue by like 50 million ARR, we had done a Series C raise from General Catalyst, and the team had grown a lot. We moved beyond just being a savings product to launch an investment product, and we launched a checking account product. I’m just really proud of what we had built over time.”
After the deal closed, Kang knew he wasn’t ready to go back to working on the finance team at a public company. So, he started looking around again and had a conversation with Immad Akhund, the co-founder and CEO at Mercury, about coming on as VP of Finance. “Square and Digit spoke to me in very personal ways: the way I grew up, my family, and so on,” Kang says. “As for Mercury, it spoke more to my career experiences: At Digit, I ran a very lean finance team, so I was running payroll and all these things that were very much on the operational side. So, I know there's so much opportunity to build tools and products that can make lives easier for startup founders or startup finance teams.”
Kang joined Mercury in July and has loved having the opportunity to run accounting, finance, capital markets, and so on. “I get a lot of latitude with the rest of the executive team to kind of poke my head in a lot of product areas where your finance person probably typically wouldn't be poking their head in,” he says.
His experience in banking, in PE, in accounting and strategic finance at Square, and being a jack of all trades at Digit all inform his work at Mercury. And one unexpected feeling has kept bubbling up: “It's kind of weird but there's a point where you feel like, ‘Man, all my life experiences have led me to this point.’”
So, why did a natural-born problem-solver who dreamed of working for the U.N., had a flirtation with philosophy, and didn’t even know what business meant find his way to a life on the finance side? Because Kang has been exhilarated by the fact the finance role is something like a mapmaker for a company.
“I know this is a bit geeky, but the way I think about it is that there is the whole universe out there. There are a bunch of different forces at work within the universe and there's a standard equation that tries to formulate how the universe works into like very specific different factors and whatnot,” he says. “In a lot of ways, finance is similar. There's a lot of stuff going on within a business, all within the context of the macro environment. But how do you actually make sense of all that? If you want to navigate that universe, finance can be a map, charting a path forward and giving the best recommendations with the best available information.”
For someone drawn to fixing problems by understanding every side of the issue, the macro-elements of finance — the ability to make the intangible tangible — has natural appeal. “The thing that finance teams are uniquely positioned to do is actually stitch together what's happening across the company into a unified view,” he says. So, perhaps the young Kang wouldn’t have been so resistant to the vague idea of “business” if someone had explained it to him that way in the first place.
“This isn’t an original thought but: the best finance leaders are great storytellers as well, in terms of how they understand and interpret the business and can actually tell a story about where it's going in the future as well,” Kang says.
His own career is a fascinating story. Where it’s going in the future? Only time will tell…
February 13, 2023
1 min read
Neo.Tax’s mission is to use tax to turn finance into a strategic lever for growing companies. In our experience, the savviest finance leaders appreciate the novelty of our approach. That’s why we’re so excited to announce the launch of our Neo.Tax CFO Advisory Council! The best tools are a symbiosis of great minds and great technology; so, we’re putting together an Avengers-level tax brain trust over at Neo.Tax…
Neo.Tax’s mission is to use tax to turn finance into a strategic lever for growing companies. In our experience, the savviest finance leaders appreciate the novelty of our approach.
So, as we continue to build and grow our offering, we’ve made it a priority to cultivate relationships with these finance leaders. Neo.Tax is a tool to optimize and maximize the value of taxes for companies — by working closely with the savviest minds who truly understand companies’ financial needs, we can make our offering indispensable.
That’s why we’re so excited to announce the launch of our Neo.Tax CFO Advisory Council! The best tools are a symbiosis of great minds and great technology; so, we’re putting together an Avengers-level tax brain trust over at Neo.Tax…
We’ll be announcing the members of our Neo.Tax CFO Advisory Council over the next weeks in a series of blog posts charting their career paths and highlighting their unique insights. Our first post about Daniel Kang, VP of Finance at Mercury, will be publishing next week. Keep an eye out.
Tax Avengers, assemble!
February 10, 2023
1 min read
At Neo.Tax, we’ve been preparing for months for the eventuality that Congress wouldn't strike a deal to end R&D Capitalization. We view it as our duty to make taxes work for innovative companies, so we’re proud to say that Neo.Tax has the only software solution that can cover all aspects of R&D tax strategy: from credits to amortization, and everything in between.
This whole year, founders, CFOs, and accountants have been staring down a new tax paradigm. When former President Donald Trump passed his Tax Cuts and Jobs Act in 2017, it included a five-year ticking time bomb that would completely change the way R&D expenses could be deducted. In earlier posts, we’ve outlined how changing R&D from a deductible expense to a capitalized one would cost companies of all sizes dearly on Tax Day.
There was hope that legislators could overturn this costly tax law before the 2023 tax year (and even pass a law that would undo the effect on the 2022 tax year), but the lame-duck Congress was unable to strike a deal. So, for the foreseeable future, R&D Capitalization is here to stay.
As we explained in our post “R&D Capitalization Has Arrived (For Now)—Here's What You Need To Know,” the new law changes the way R&D spend can be deducted, which completely changes the calculus for pre-revenue startups. Up until 2023, R&D spend could be deducted all at once, which allowed companies in the red to stack NOLs. Now, R&D spend must be amortized fractionally over the course of 5 or 15 years, depending on whether the expenses are domestic or international. That means, tax bills will rise and NOLs will become harder to compile; it’s bad news for innovative companies.
At Neo.Tax, we’ve been preparing for this eventuality. We view it as our duty to make taxes work for innovative companies, so we’re proud to say that Neo.Tax has the only software solution that can cover all aspects of R&D tax strategy: from credits to amortization, and everything in between.
We’re the only company on the market that specifically addresses this new tax change. Fortune 500 companies are treating this as a Big Forkin’ Deal, so it’s essential to get ahead of this before it’s too late. Get in touch today, or come to our weekly webinar to learn more about how to weather this coming tax storm!
BECOME AN R&D CAPITALIZATION EXPERT:
Tax law is rarely popular, especially with both sides of the aisle. But the R&D tax credit has done the...Text Link
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January 23, 2023
1 min read
The most unpopular tax time bomb just went off... what can you do about it?
the world’s most unpopular tax change just went into effect.
but how, if both parties hate this law, did it still go through?
and why is everyone surprised that it actually happened?
and why does it affect businesses that aren’t profitable?
and what in the heavens can you possibly do about it?
we answer all of these questions and more below =]
something had to pay for trump’s ‘17 tax cuts.
a tax time bomb, scheduled to go off in 5 years.
a terrible idea, but it balanced the budget perfectly.
and having it go into effect 5 years later bought time.
more than enough time for congress to repeal or delay it.
if both sides could get their act together and work together.
republicans + democrats agree this law had to be repealed.
but because both parties agreed on how terrible it is,
neither party could use it as a bargaining chip,
to get something else passed in return.
i wish i was joking — i am not =/
companies can no longer write off r&d expenses.
(costs related to building or improving products)
this hits technology companies particularly hard.
of all sizes! baby startups that aren’t profitable,
up to raytheon cutting cashflow by $2b. yikes!
when taxes made sense, the math used to be:
$2m revenue - $5m expenses = -$3m losses
the new math, starting tax year 2022, is now:
$2m rev - ($5m/5years → $1m) = $1m profit
worse, offshore r&d gets spread over 15 years:
$2m rev - ($5m/15y → $300k) = $1.7m profit
the government is being a little schizophrenic.
on the one hand, r&d is rewarded with r&d credits.
on the other hand, r&d is punished with capitalization.
and those rewards + punishments are to differing degrees,
depending on each company’s revenues, expenses, NOLs, etc.
sounds like an optimization problem to me! to balance all of that out.
fortunately, this is the perfect problem for software to solve.
neo.tax connects to your accounting, payroll and business data,
then scans the universe of all possible tax outcomes for your situation,
to apply the tax strategy with the most optimal outcome for your business.
can you imagine getting an estimated tax bill from the irs,
then going back in time to adjust your tax strategy,
way after the fact as if that isn’t suspicious?
January 5, 2023
1 min read
During the rollout of his signature corporate tax cut, the Tax Cut and Jobs Act of 2017, President Donald Trump argued that his plan would stop U.S. companies from offshoring their work overseas. But according to Reuters, it failed to curtail the flow of American jobs abroad…
During the rollout of his signature corporate tax cut, the Tax Cut and Jobs Act of 2017, President Donald Trump argued that his plan would stop U.S. companies from offshoring their work overseas. But according to Reuters, it failed to curtail the flow of American jobs abroad:
“During the four years of the Trump administration, [the Labor Department] program certified 2,095 petitions covering 202,151 workers who lost jobs that moved overseas. That’s only slightly less than the 2,170 petitions approved during the last four years of the Obama administration, which covered 209,735 workers.”
Additionally, the TCJA included a provision that changed how R&D deductions can be taken by American companies—rather than being deducted all at once, R&D costs must be amortized over 5 years for domestic spending and 15 years for foreign expenditures. The change threatens to disincentivize American companies to invest in innovation. “In a letter dated Nov. 4, 178 chief financial officers, primarily from large U.S. companies, including Ford Motor Co., Raytheon Technologies Corp., Lockheed Martin Corp. and Boeing Co., said the new rules create a competitive disadvantage for American companies and will lead to job losses and thwart innovation,” an article in the Wall Street Journal explained. “They are asking Congress to move back to immediate deductibility before the end of the year.”
The CFOs argue that the R&D capitalization change will threaten American business and foreign policy interests; they argue that a country that stops prioritizing innovation will fall behind on the global playing field. “On a level playing field, the U.S. can compete for R&D investment with any country in the world,” they wrote. “Unfortunately, the current playing field is tilted against the U.S., and every day this policy continues to be in place makes it harder for the U.S. to remain a global leader in innovation.”
So, how does American R&D policy compare to competitors abroad? And what could we learn from their policies? Ernst & Young’s (EY) 2022 Worldwide R&D Incentives Reference Guide offers a fascinating look.
Since World War II, the United States has functioned as the world’s economic superpower. Prior to that, Great Britain held that mantle, and many believe that China may soon surpass the U.S. and claim that title in the future. It turns out that both the UK and China have committed to a much more robust R&D investment than the current American plan—the two countries have “super deductions” for R&D expenditures, allowing companies there to deduct more than 100% of R&D costs from their taxes. According to EY’s Worldwide R&D Incentives Guide, mainland China-based companies can deduct 175% of qualified R&D expenses for purposes; manufacturing enterprises began deducting up to 200% of qualified R&D expenses starting in 2021!
Until a new R&D policy was announced this month, the UK had a more favorable (or, perhaps, favourable) R&D credit for all businesses, and was especially invested in domestic small-to-medium-sized enterprises (SMEs). SMEs could claim an enhanced deduction of 230% of qualifying R&D spend, as a deduction against taxpayers’ profits. If the deduction was more than the taxes, these SMEs could claim a cash credit at 14.5%, according to EY’s Worldwide R&D Incentives Guide.
The tax code in the UK and China is a demonstration of the way each country works to incentivize R&D, but taxes only tell part of the story. The UK also has a large number of public grants meant to spur innovation. For example, Innovate UK, which gets funding from the Department for Business, Energy & Industrial Strategy (BEIS), works to get academia and industry working towards UK-based patents and products and gives around £1 billion in direct grant funding every year for company-run R&D projects.
The United States has a similar SMB R&D grant called the Small Business Innovation Research program, but most of the R&D spend is done by private industry. As the Wall Street Journal explains: “U.S. companies spent an estimated $532 billion on R&D in 2020, representing the lion’s share of what the U.S. as a country allocates to it, according to the National Center for Science and Engineering Statistics, a statistical government agency. A 2019 report from Big Four accounting firm Ernst & Young forecasts that U.S. R&D spending would be cut by $4.1 billion a year for five years because of the change and then by $10.1 billion annually for the subsequent half-decade.”
The change in R&D capitalization threatens to accelerate that reduction in industrial R&D spending. Without the public grants to buoy American innovation, it could lead America to fall behind in the global race towards innovation.
India is a fascinating case study in R&D tax law and its impact. During its rapid push to liberalize and modernize the economy, the Indian government introduced an R&D tax credit to stimulate innovation. From 2001 to 2010, the R&D tax deductions were worth 150% of any capital and revenue R&D spend by firms in qualifying sectors. Starting in 2010, the R&D tax deduction was increased to 200% and became available to every Indian company. That new structure helped make India one of the most tax-friendly countries in the world in regards to R&D. (Note: in 2020-21, the deduction was reduced to 100% of R&D expenditure.) Researchers at three universities looked at the effects and found a substantial rise in R&D spending and patent applications in both India and in the US due to the changes: “We find that the R&D tax credit scheme and its 2010-11 reform spurred firm innovation,” they wrote in their 2021 journal article R&D tax credit and innovation: Evidence from private firms in India. “In response, such firms became more innovative and more productive.”
The finding is intuitive, but it doesn’t make it any less striking when compared to the US policy toward R&D spending: lowering the cost of R&D through tax credits increases research spending, which leads to more domestic patents.
Canada has an interesting R&D policy that could be a valuable model for making R&D reform more politically palatable in the United States. The country offers a 15% federal R&D credit on all qualifying expenses. However, in addition, they offer an enhanced credit rate of 35% for R&D spend by small Canadian-controlled private corporations (CCPC) on their first $3 million of R&D expenditures each year. That 35% credit is 100% refundable.
The policy is specifically crafted to incentivize domestic small-and-medium-sized businesses run by Canadians. For a company to qualify as a CCPC, it must be privately owned and operated in Canada, and must not be controlled directly or indirectly by a nonresident or a public corporation.
The PATH Act, passed in 2015, is an example of an American law with a similar aim. It amended the R&D Credit so that it could count against payroll taxes rather than just income tax for pre-revenue and early-revenue startups. It meant that the credit could be claimed by the companies that were actually sparking much of American innovation over the last decade: technological startups.
Clearly, as the letter-writing CFOs explained, the change to R&D Capitalization threatens to make America a country that disincentivizes domestic R&D. That could have stark consequences for the next generation of American business and American foreign policy. There seems to be bipartisan support for a change to the law, but it’s unclear if the political climate or economic moment will allow it to be prioritized. According to a recent piece in Marketwatch, the “bipartisan push on R&D tax break looks likely to flop.”
At Neo.Tax, we hope lawmakers will look abroad and realize there is a way to incentivize innovation. Perhaps a “super deduction” is not possible at this moment, but a model that allows SMBs to continue to innovate should be a no-brainer. Either way, we’ll do our part to make sure startups maximize their R&D credits and minimize their R&D tax burden; that’s why we built Neo.Tax, and our mission hasn’t changed.
November 30, 2022
1 min read
Every pollster and cable news talkinghead predicted a Red Wave: the Republicans would take back the House and the Senate—the only question was by how wide a margin. But then, Election Day came, and the Democrats outperformed both expectations and the historical…
Every pollster and cable news talkinghead predicted a Red Wave: the Republicans would take back the House and the Senate—the only question was by how wide a margin. But then, Election Day came, and the Democrats outperformed both expectations and the historical trends. Against all odds, they actually flipped one Senate seat and seem poised to lose the House just barely.
The Red Wave turning into more of a Red Trickle has potentially massive implications on who leads the Republican Party moving forward, as well as on the future of the courts and the fate of many pieces of legislation. But, for our purposes, we want to understand what it could mean for the changes to R&D Capitalization brought on by Donald Trump’s Tax Cuts and Jobs Act (TCJA).
As a general rule, it’s difficult to pass tax legislation in a divided Congress. If we assume that the current projections continue to hold, and that the Republicans will capture a small majority in the House, history tells us that R&D Capitalization may be here to stay for a couple more years. However, as the surprising midterm results have shown, this may be an ahistorical time. So, here are four scenarios and how they may affect R&D Capitalization rules.
If the Democrats somehow make a late push in the remaining races and retain a small majority in the House, they could repeal the R&D Capitalization rule by pairing it with an extension of the Child Tax Credit. The Child Tax Credit was a part of 2021’s American Rescue Plan, and it increased the per-child credit to $3,000 for kids under 6 and $3,600 for kids over 6 for qualifying families. There is bipartisan support for repealing R&D Capitalization and strong Progressive support for extending the Child Tax Credit, so pairing the two is viewed as a compromise to appease both business and progressive constituencies.
But, with all indications pointing to Republicans taking the House, this scenario seems unlikely.*
*Update: Late on Wednesday afternoon, the Republicans officially clinched the House, taking Scenario #1 off the table.
The idea of bipartisan compromise feels like a fairy tale these days, but there is some signaling that the Republican Party may be moving away from its MAGA wing after the disastrous results of the midterms. If that’s the case, R&D Capitalization may be a place where bipartisanship wins out, because the center of both parties seems energized to repeal the Capitalization change.
If this were the case, Capitalization rules could be rewritten during the next session, which would mean the tax effects would still hit SMBs hard for 2022. Still, any repeal of R&D Capitalization would be a huge boon for innovative startups, so any scenario that leads to the change should be celebrated as a win for American businesses.
If the Republican lead in the House holds—and all indications are that it will—a busy lame-duck session will be coming for the Democrats. As CNN reported: “At a news conference Sunday, Senate Majority Leader Chuck Schumer warned of a busy lame-duck session, promising ‘heavy work’ and ‘long hours.’” It’s unclear if R&D Capitalization will be a priority during the frantic session, but the R&D Capitalization change paired with the Child Tax Credit is a real possibility. If that’s the case, the new law would go into effect before the next Congressional session begins, which would mean there is a small chance that the R&D Capitalization changes could be retroactively altered for 2022 before SMBs are hit with their massive tax bills. Here’s hoping that happens!
Unfortunately, Scenario #4 is an all-too-likely outcome. If the Republicans take back the House and do not take the midterm results as a signal that voters want more compromise from Washington, we may see the same butting of heads between both parties that has become the hallmark of the last decade. On Tuesday, House Republicans voted Rep. Kevin McCarthy as the prospective next Speaker of the House over a far-right challenge from Rep. Andy Biggs. It’s a sign that the Republicans are not fully embracing MAGA any longer, but it’s far from a clear indication of a new path. Instead, it leaves us in a holding pattern for a bit longer when it comes to R&D Capitalization.
House Republicans may dig in their heels and refuse any compromise on R&D Capitalization that includes the Child Tax Credit; if Democrats do the same, the law may be on the books until one party controls both chambers of Congress. That very likely could happen in 2024, but with the speed in which the political winds have been changing, it leaves SMBs in limbo.
Because there is still so much uncertainty around R&D Capitalization, savvy founders should prepare as if the R&D Capitalization rules are here to stay. At Neo.Tax, we have best-in-class software and a team of experts who can help you prepare.
We continue to hope that Washington will come to their senses and overturn a rule that experts have explained as “a cynical gimmick.” Let’s hope lawmakers prioritize innovative American businesses over political wins.
November 16, 2022
1 min read
We’ve heard the stresses of the current inflationary moment explained in a lot of ways—through the rise in gas prices, the cost of Thanksgiving dinner, and the exorbitant increase in mortgage rates—but a recent LinkedIn post by Tomasz Tunguz framed it in a way every founder should pay attention to…
We’ve heard the stresses of the current inflationary moment explained in a lot of ways—through the rise in gas prices, the cost of Thanksgiving dinner, and the exorbitant increase in mortgage rates—but a recent LinkedIn post by Tomasz Tunguz framed it in a way every founder should pay attention to. Tunguz wrote: “8% annual inflation for a startup means losing a month of runway every year.”
Startups take VC funding in order to extend the runway needed to turn an innovative idea into a valuable company. And as any founder knows, keeping your company lean allows you to use that runway to gain momentum and have your startup take flight.
But the 8% inflation is wreaking havoc on the war chests of innovative startups. Not only has VC funding begun to dry up during this economic downturn, but the money startups have in their banks already is worth much less than last year. And as we’ve outlined before, a new change to the tax law went into effect this year which serves as a brutal one-two punch along with inflation for founders: R&D Capitalization change.
As Tunguz explains in his post, in the mid-2000s, founders turned to riskier strategies to increase yield to combat the diminishment of their purchasing power. At that time, the method was Auction Rate Securities, which promised interest rates at a higher return than a savings account. Obviously, we all know how that story ended: the ARS market cratered in 2008, Lehman Brothers filed for bankruptcy, and the global economy collapsed.
Clearly, the best solution to inflation is not risky investments for startups. Instead, founders should look to the existing tax code for a tool to fight runaway runway.
Firstly, this means accepting the reality that tax season has become a year-round endeavor. R&D Capitalization means that money spent on R&D can no longer be deducted in full in Year 1; that means early-revenue companies can be in the red in reality, but appear in the black come tax day. The same company that once received valuable NOLs to carry forward may now be burdened with a giant tax bill—compounding the impact of inflation on startups’ runway.
But this isn’t all doom and gloom. At Neo.Tax, we’re tax wonks obsessed with this type of minutia—we’re committed to helping founders continue to innovate despite inflation and the R&D Capitalization change. We want to help founders plan strategically throughout the year, beginning at the time of hiring and taking location, profitability timing, and the type of R&D spend into account. The third item on that list —the type of R&D spend—is so important, because only the expenditures that pass the IRS’s 4-Part Test qualify for the R&D tax credit.
The R&D tax credit was written into tax law as a means to incentivize startups to create innovative products within the United States. And yet, the majority of startups miss out on claiming the money they’re owed every tax year. Now more than ever, it’s essential to find every way to extend runway, and claiming your R&D tax credit can return up to $250,000 per year to your startup’s coffers.
Find out how much your startup is owed. It takes less than 30 minutes to file your credit using Neo.Tax.
This is a belt-tightening moment, but we’re committed to helping founders have enough space to breathe as they turn their ideas into game-changing companies.
November 9, 2022
1 min read
As Q3 earnings reports emerge, a new reality is coming into focus. Meta’s disappointing projections sent the social media giant’s share price to free fall, which captured most of the headlines. Analysts focused on runaway spending and the hit to their ad business, but there is another factor which Meta was already focused on as early…
As Q3 earnings reports emerge, a new reality is coming into focus. Meta’s disappointing projections sent the social media giant’s share price into a free fall, which captured most of the headlines. Analysts focused on runaway spending and the hit to their ad business, but there is another factor which Meta was already focused on as early as February 2022.
In their 10-K, they wrote: "If our stock price remains constant to the January 28, 2022 price, and absent U.S. tax legislation changes and other one-time events, we expect our effective tax rate for the full year 2022 to be similar to the effective tax rate for the full year 2021. This includes the effects of the mandatory capitalization and amortization of research and development expenses starting in 2022, as required by the 2017 Tax Cuts and Jobs Act (Tax Act). The mandatory capitalization requirement increases our cash tax liabilities but also decreases our effective tax rate due to increasing the foreign-derived intangible income deduction."
We know now that the stock price has not remained constant, but it’s the second part of the excerpt that is essential to focus on for founders: one of the biggest companies on the planet has altered its tax planning based on the changes to R&D Capitalization. Clearly, the change to how R&D spending can be deducted is a BIG FORKIN’ DEAL!
Former President Donald Trump’s Tax Cuts and Jobs Act of 2017 was sold as a giant tax cut, but it included a five-year timebomb that’s set to go off this year: the change to how R&D costs are deducted will vastly change the tax bills of the most innovative companies in America.
Meta is far from the only public company that has earmarked the marked change: Raytheon, Lam Research, Amazon, and many others have mentioned the effect of the R&D capitalization change in their recent 10-Ks and earnings calls.
As Lam Research explained in their August filing: “A provision enacted as part of the 2017 Tax Cuts & Jobs Act requires companies to capitalize research and experimental expenditures for tax purposes in tax years beginning after December 31, 2021 (our fiscal year 2023). If this provision is not repealed or deferred, we expect our fiscal year 2023 cash tax payments to increase significantly compared to our fiscal year 2022.”
In Amazon’s 10-K, they wrote: “Effective January 1, 2022, research and development expenses are required to be capitalized and amortized for U.S. tax purposes, which will delay the deductibility of these expenses and potentially increase the amount of cash taxes we pay."
But most strikingly of all, was a move by Raytheon this September. The aerospace and defense company adjusted their free cash flow outlook from $6 billion all the way down to $4 billion because of the impact of the R&D capitalization change! It’s a signal—a loud one!—that they don’t believe the R&D capitalization law will be amended before 2023. And clearly, the law staying as is vastly alters their tax reality.
If some of the largest corporations are altering their earnings projections and warning their investors of this impending doom, it stands to reason that you should do the same. The reality is: tax season has been expanded to a 12-month job. The innovative companies that start tax planning at the time of hiring and R&D spending will be the ones who best weather the storm and address the rising costs of R&D. At Neo.Tax, we have been studying the change and feel confident that we can help startups continue to build innovative technology without being burdened with an untenable tax bill.
These megacorporations have been planning for the change for months or years; if you’re just learning about it, the time to act is now.
We built Neo.Tax to make sure innovative startups can extend their runway and build the products they’ve dreamed up. We’re tax wonks committed to making tax season as painless as possible. So get in touch today!
October 28, 2022
1 min read
Just like every other startup, we had our fingers crossed that Congress would come together to undo the new R&D Capitalization rules before they take effect next tax year. But, unfortunately, it seems as though the new reality is here to stay (at least for now). We built Neo.Tax to...
Just like every other startup, we had our fingers crossed that Congress would come together to undo the new R&D Capitalization rules before they take effect next tax year. But, unfortunately, it seems as though the new reality is here to stay (at least for now).
We built Neo.Tax to make tax season valuable, rather than stressful, for innovative companies. Unfortunately, the new R&D Capitalization rules mean that a 12-month tax strategy has now become essential for founders.
So, here’s our Founder’s Guide to R&D Capitalization.
You can download a PDF copy of our cheatsheet here.
Let’s start with hiring, which any founder can tell you is what makes or breaks a startup. You’ve perfected your talent identification. You’ve honed your interview process. You’ve streamlined your onboarding. But unfortunately, the changes to how R&D spending is calculated means you now must be laser-focused on the where as much as the who.
Before these changes were written into law by Donald Trump in 2017 (see our previous post for more info), 100% of your R&D spend could be deducted from your income. If you brought in $1 mil in revenue and spent $2 mil on R&D to develop your innovative product, you would end the year with $1 mil in Net Operating Losses (NOLs). Now, you have to spread the R&D deduction over 5 or 15 years depending on if the spend is made in the United States or abroad—this is called amortization. Worse than that, only 6 months of the first year of R&D spend can be deducted. So, if the $2 mil you spent on R&D is domestic, you’ll only have $200K to deduct from your $1 mil.
This new reality means that startups that once were pre-profit now look like post-profit companies during tax season—rather than accruing valuable NOLs as they prepare to become cash-flow positive, they’re being saddled with an expensive tax bill.
This is why you now need to start thinking about tax season at the hiring stage.
In that first year, a $2 million R&D spend in the United States leads to a $200K deduction. But if that R&D spend happens overseas? Only $66,666.66 can be deducted from your $1 mil revenue. For tax purposes, that means a foreign employee working on R&D costs you 3 times as much.
Because foreign spend needs to be amortized over 15 years, that means you’ll be feeling the costs every single tax season as well. By Year 2, a domestic R&D spend of $2 million will bring you $600k in deductions. If that spend is foreign? Year 2’s deduction will only be $200k. By Year 3, it’ll be $1m vs. $333,333.33. Year over year, as the spend grows, that 3x difference hurts more and more every April or October.
Most experts agree that the change to R&D Capitalization was “a cynical gimmick intended to make the bill look cheaper for official budget scorekeeping purposes,” as Washington Post columnist Catherine Rampell put it. But taking it at face value, the new law is ostensibly designed to promote hiring and spending within the United States. Until the law is amended, that is the reality for startups when it comes to R&D: unless you can save more than 3x, hiring abroad is probably not worth it.
As we explained above, the changes to R&D Capitalization markedly affects the amount of NOLs that pre-profit companies will collect each year. Whereas before the change, a company that was $1m in the red would receive a $1m NOL going forward, now, due to amortization, that company might appear as though they are $800k in the black. That means, rather than $1m in NOLs, they’ll be burdened with a tax bill of $168k (21% of $800k). All of a sudden, being unprofitable is an expensive prospect for startups.
With this new law, NOLs can be used to offset only 80% of taxable income, but those NOLs can be carried forward indefinitely. (Before the change, NOLs could offset 100% of taxable income, but would only carry forward for 20 years.) Thus, a pre-profit company could spend 5 years in the red, only to get hammered with a massive tax bill once they do become profitable, because they can no longer be entirely rescued by their NOLs. Historically, these NOLs have functioned as a strategic tool for startups—a skilled founder could plan ahead for that first year of profitability and apply their stockpile of NOLs to vastly decrease their tax burden for that year—and even some of the years that followed. In fact, NOLs have even been considered when valuing startups for acquisition.
These new rules have also diluted a startup’s ability to collect NOLs, especially if that startup spends heavily on R&D. Now, it has never been more important to focus on the manner in which you spend on R&D—pay attention to the Four-Part Test and make sure your R&D spending can be claimed as an R&D credit! Because expenses that do not qualify for the R&D credit must be amortized (with only 1/10th being deductible in Year 1), R&D spending that does qualify is more than 10x as valuable to a pre-profit startup.
So, what does that mean for your startup’s tax strategy? It means that it’ll be much harder to remain unprofitable in the view of the IRS. The upshot is that you may need to accelerate your gameplan: it’s exceedingly expensive to be in the red in reality, but in the black when it comes to your taxes. That can lead to a triple whammy, where you burn through your runway, pay an expensive tax bill, and fail to accrue any valuable NOLs.
We’ve built Neo.Tax to give startups peace of mind when it comes to their taxes, and we’ve done this by maximizing R&D credits for our customers. The change to R&D Capitalization has made that more important than ever. We’re tax wonks committed to letting American startups be the most innovative in the world. So, let us help you continue to create incredible innovation and continue to do the work that inspired you to found your company in the first place.
October 14, 2022
1 min read