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.

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!