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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.
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The first thing to know about Nic Malianni is that he loves to hustle. Since the age of 12, he’s always had a job: construction, at a golf course, and, most recently, as Head of Accounting at the connected workplace, productivity software company Notion. While in college at California Polytechnic State University in San Luis Obispo, he found himself without a job and felt the itch. So, Nic saw a Craigslist ad from the Donati Family Vineyard and got in touch. “I was 20 years old and you can’t really work at a winery when you’re not 21, but I just said, ‘Hey, I'll do your gardening. I’ll rake your bocce ball court. Whatever you need me to do, I'm happy to get my hands dirty,” he remembers. “So that got me in the door.”
For the next three-and-a-half years, Nic became an indispensable cog at the winery. He took naturally to sales and to systems, getting the young winery’s offerings into local restaurants and grocery stores and managing sales reporting. “Their first vintage was 2003 and I started there when their 2005 was being released,” he says. “So, I consider it my first startup.” He is still a proud wine club member today.
Nic graduated with a Business Admin degree with a focus in Accounting, Finance, and Economics and dove into accounting. Many accountants focus on debits and credits and closing the books, but he’s always started with the needs of the business and viewed the problems with an accounting and systems lens. “It’s always been top of mind to help businesses run more efficiently through scalable systems and processes,” he says. He’s held onto the one feeling that’s proved a motor for his work life: “Curiosity.”
“How do we do this? How can we do it better? How can we make it simpler to help us provide the best service for our customers or to alleviate some sort of pain that my team is feeling?” he says. “In general, finance systems have been pretty underserved for a long time. There's always the hottest new engineering tool or the hottest new marketing or sales tool. Finally, we’re seeing more and more new finance tools like Neo.Tax. I'm really excited about what I'm seeing in the market.”
Nic sharpened his accounting skills at Grant Thornton for four years after college, working on the audit side. “I personally chose Grant Thornton, because I wanted to have as many clients as possible to get a broad set of experiences,” he says. He worked with 50 companies, some private and some public, and got a rare look at their practices, their challenges, and what worked and what did not. He tapped the knowledge of colleagues who had extensive experience in audit but also on the technical side. “It’s a very research-driven profession,” he says. “It gives you a window into the why behind the decisions of how a company makes their accounting decisions.”
But after those four years, when Nic felt he understood the why, he began itching to answer another question: “The missing piece at an auditing firm is the how,” he explains. “Or put another way: the actual execution.”
So, Nic joined Intercom, the AI-empowered customer service solution, in 2016 as the Accounting Manager, eventually moving up to the role of Assistant Controller by the time he left in 2021. “When I joined Intercom, I felt ready to exercise my entrepreneurial/building mindset,” he says. “‘How can I help build this thing and translate that why and to the actual execution behind it?’ That really excited me and it was challenging. Very, very challenging.”
The biggest challenge he faced which he hadn’t been expecting was how essential it was to be a champion for your accounting advice. On the audit side, he’d existed in a place where there were clear rules; it was sometimes confusing why best practices weren’t always followed. But on the other side, he realized that a skilled accountant or controller needed to have the ear of a decision-maker to guarantee that the resources were made available.
“You have to be able to compellingly explain the why in order to get the resources to build the best systems,” he says. “If you don't have resources, then you need to figure out a bandage to account for this in a way that is going to be acceptable until you can build that long-term solution.” Nic realized that was why so many startups struggled with their systems and books early on. “It often falls on the grit of the accounting and finance function to actually go in and just get it done,” he explains.
At Intercom, he used the technical skills he gathered in his years at Grant Thornton and then expanded them by becoming an operator. Eventually, as the company grew, he moved into a management role. “I felt like, ‘Hey, I want to get back to building mode,’” Nic remembers. “That's what attracted me to Notion. And, you know, I've been building ever since.”
Nic wanted to get back to “building mode” but he also wanted to join a company that people loved. “If you look at Notion’s YouTube following, Twitter following, and all the socials, it’s insane how much people love the product,” he says. “The affection for a business software product is just absolutely phenomenal. And it's really rare.”
So, he started talking to people at Notion and realized that their engineers and executives were at the top of their game. “I wanted to be a part of it,” he says. When Nic arrived at Notion in 2021, the company was still just 65-70 employees. He took over as Head of Accounting.
Intercom grew rapidly in Nic’s years there; Notion’s growth has been even more exponential. “I had to grow just as fast as Intercom did and then I joined Notion and the speed has been even faster than that,” he says. “When I first joined, there were a lot of great people and there was a foundation that was put in place. But we’ve had to continue to uplevel the way that we worked, and the way that we serve the business and our customers, and how to do it in a faster manner.”
In his two-plus years so far, his team has added 16 people, Notion’s gone through two acquisitions, and they’ve had to implement numerous systems. With all the steps that I've made in my career, it's kind of been out of curiosity,” Nic says. “If I ever feel like I’ve stagnated from a learning perspective, I know it’s time to change course.” Obviously, the Notion ride has been a learning overload. He’s loved every minute of it.
“It's been a journey,” he says, grinning. “The thing that I've enjoyed the most is that every quarter, there's something new to do and something new to learn.” Obviously, there is ongoing accounting work to be tackled, but “for the most part, it’s not that stereotypical 9-to-5 where you show up and know what you're gonna do every day. That has been very fun from a learning perspective.”
At a startup, the role of accountant becomes a mix of traditional and strategic, which Nic loves. “Especially earlier stage your role is to help the company grow in any way. From a financial side, there are core accounting things like bookkeeping and taxes but there are also strategic tasks like, ‘How can we help design the pricing and packaging to ensure that they’re going to work both from a systems perspective and a customer experience perspective while helping the business grow?’” Nic also mentions that it’s the accountant who looks at every bill and contract, so they should be providing valuable insights to the Go-to-Market teams about how other companies are building their sales engines, pricing their products, and designing their checkout flow.
“The true back-office transactional side is just table stakes,” he says. “But for a startup to succeed, the finance function really has to be strategic. You can live in that land of customer experience and sales strategy, and drive strategic decisions if you want to. I think every accounting and finance person should.”
In September 2022, Adobe announced that it was buying Figma, the extremely popular product design tool, for $20 billion. Since its founding a decade ago, Figma has become an indispensable part of the tech world’s product design toolbag, so the news reverberated across the Valley and beyond. For Figma CFO Praveer Melwani, it wasn’t a ripple compared to a much bigger wake rolling through his life. “It’s funny how timing works out,” he tells us, grinning. “My wife's due date was the same day we were scheduled to announce.”
Praveer is from Toronto and went to school at Western University in Ontario where he studied business administration. His dad was a dental supply salesman and Praveer always envisioned that he’d join the family business, but he had an itch to get out of Canada for a while before coming home. So, he applied for jobs in San Francisco, landing a role at Union Square Advisors in the summer of 2012. “It was just a little bit of luck and good fortune,” he says. Based on where it all went from there, that framing seems like more than a bit of an oversimplification.
Dropbox was scaling rapidly in 2014 and the Strategic Finance team was interviewing hundreds of candidates in an effort to hire the best handful of people to come join. Praveer wowed in his interviews and was offered a spot on the burgeoning team. “Rather than go through the standard venture, hedge fund, or private equity route, when the folks at Dropbox presented this opportunity that sounded like more than finance, I said yes,” he explains. “I had the fluency and understanding of what's going in the P&L so I could help drive some of the business-oriented tasks forward, but, ultimately, I was more excited to learn how this business ticked and moved. That's what drew me in.”
The StratFin team that Ajay Vashee had been tasked to build was designed to attract high-achievers who thought differently about finance. The mandate at the time at Dropbox was “get the very best people in the world to join,” as Ajay explained it, to keep the company on a best-in-class growth trajectory. It proved a perfect fit for Praveer. “I view my capabilities as someone who can come in as a structured thinker and help someone frame a problem in a thoughtful way,” Praveer says. “But I get excited about learning and I get excited about having a much broader footprint than just like the core spreadsheet and operating model.”
Eventually, that desire to expand his footprint led him to leave Dropbox for the Business Operations team at NerdWallet in September 2016. Ten months in, he was laid off. “Within six months, I was already getting to the place where I was itching to do something a little bit different. Soon enough, it was a last-person-in, first-person-out situation,” he says. “But, had I not gotten that kick in the pants to go and look, I don't know if I would have found Figma.”
He credits good luck for much of his success but does admit it’s not the whole story. “Timing, the relationships you have with the people around you, and your ability to react are what make you successful,” he says. “But I think so much of it — the majority of it — is luck.”
When Praveer was hired at Figma in July 2017, it was still a small startup. He was the first business ops hire; his role was amorphous but he quickly was tasked with managing finance and accounting. “My first set of projects was setting up our Stripe instance, making sure that the data was flowing in the right way,” he remembers. “We were using Gusto for payroll and so everything was on autopay. I was just hoping and praying that things were going right.”
Quickly, Praveer began thinking strategically — once a StratFinner, always a StratFinner — and began spending time working in concert with the team launching Figma Pro. “I spent a lot of my energy making sure that the data pipelines were really flowing between our financial systems and what we were seeing on the product side,” he says. That ultimately became my foray to drive conversation around how our users are navigating our funnel and what they’re doing once they're actually on one of our paid plans.”
That first bit of insight gave Praveer entry into high-level leadership conversations. “I found myself being able to provide insights and it actually informed some of the product decisions and the ways in which we structured our sales orgs.” It became clear to the Figma executives that Praveer could deliver strategic advantages if they let him build a finance team.
“Over the next couple of years, we then went from a one-tier company to having a couple of tiers. We went from purely self-serve to having a sales team,” he says. “The team that I was going to architect would tackle building the business infrastructure that would keep pace with the company as we were scaling.”
As he hired, Praveer would give applicants a “silly Excel test” — he figured: “If you understood the ins and outs of the financial statement, you can build a model.” Soon, he built out a team that could tackle any financial task that was thrown their way. “I still would say that today, I'm by no means an expert, but I have tried to hire around myself so that I can feel confident in the collective expertise at Figma,” he says. “I brought on Tyler Herb as our controller who previously was at Slack for a number of years. We brought on an audit committee chair on our board, Kelly Kramer, who was previously a storied and tenured CFO at Cisco. So, I think surrounding myself with the right people was essential.”
Praveer has always been curious to understand all aspects of the businesses he’s worked for and he stressed that same curiosity for his team at Figma. “I pushed my org to always have a pulse on the core sets of drivers and metrics for what is actually the heartbeat of Figma and how can we use that to help drive conversations with the product or to go-to-market teams,” he explains. “I’ve always had that desire and excitement to go and learn about an area that you may not necessarily need to know everything about for your core craft on the finance team. But if you do, that knowledge will make you that much more of an impactful partner, which is part of the core fabric of the culture that we built.”
His finance team was first and foremost focused on driving good financial accountability and hygiene, because “we had aspirations of where we wanted to go,” he says. “We felt that if things keep going, we're going to be in a position where we're going to have wanted to have the rigor a couple of years prior, so that we have a set of financials that folks feel are reliable and thoughtful.”
But that didn’t mean Praveer’s team focused solely on accounting. He’d created a culture where finance could be a motor for innovation and he always encouraged his team to explore every aspect of the company and see where they could lend insight. “And individuals were getting rewarded for it. They were seeing that the conversations that they were getting pulled into were really unique,” he says. “The experiences that they were having at Figma were materially different than they had in other places because they were pushed to do more.”
Early on at Figma, the team offered the service for free. As Praveer sees it, CEO Dylan Field and his team were craftspeople and wanted to keep tinkering until their tool was perfect enough to charge for.
But it was clear to the investors and the business side that Figma had found a pocket of users who knew their product design tool was indispensable. Everyone at Figma finally agreed that charging was the best way to make certain their business — which designers had come to rely on — would be sustainable for the long run. “Customers explained, ‘The only way that we can continue to invest in Figma as a tool for our broader design team is to know that you guys are actually charging for it because that's how we can know this tool isn't going to go away,’” Praveer says. “And so, part of our story is: if you've got something, charge for it, because people will know that you see value in it. They’ll invest in the solution you’re delivering and the system will grow as well.”
Figma took the lesson to heart. They knew their core customers were designers and they wanted to be as transparent as possible with them. They believed there was value in that trust. “We don't discount our product. What you see on the website is what you get. We're really transparent with it and we wanted to use that to our advantage over time,” Praveer says, explaining that their competitors approached pricing very differently than Figma. “We would lean on that transparency and then we’d put our money where our mouth is by delivering outsized value to the customer. That's been one of the core values that we believe continues to be true: we want to make sure that as we invest in the community of designers who ultimately will become our advocates. We want to make it feel like it's a no-brainer decision to pay for the tool.”
Praveer came to Figma when there were fewer than 30 employees as the first biz ops hire. Today, the company has over 1,300 employees and has announced a pending $20 billion sale to Adobe. So, how did Praveer grow in his role as his responsibilities and Figma expanded? “When someone asks me what they should do when they're new in a role, I always say: find that individual that you can ask questions to and not feel any shame. Honestly, no question is a dumb question, especially when you're trying to build something for the first time.”
He leaned heavily on peers from his days at Dropbox who had moved on and helped scale other businesses. There isn’t a situation he can think of when he took on a new task for the first time and didn’t make a call to someone to ask a question or two. It’s that network of expertise that’s allowed him to feel confident as he makes decisions on a larger and larger scale. “Being able to just pick up the phone and learn from folks, whether it’s an idea either for benchmarking or for the type of person to hire, I don't think I could have been able to do it without having folks in my corner,” Praveer says. “So, when given the opportunity to speak and share or have a conversation, I'm always in this like pay-it-forward mentality. I will have a conversation with nearly anyone because I also get a lot of energy from it, but I also think that's what's gotten me to the place that I'm in right now.”
So, yes, he’s been lucky. But clearly, good fortune is just a small part of the equation.
A reminder from Neo.Tax: The tax deadline for S-Corps is coming soon!
For any S-Corp — defined by the IRS as “corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes” — the extension tax deadline is September 15, 2023. So, now is the time to get your books in order and to file your R&D tax credit.
Set up a call with one of our tax experts who can walk you through our automated, streamlined process — because you’re filing in September, you’ll be able to claim the tens of thousands you’re owed by the start of Q4 rather than waiting until 2024.
An important note for California S-Corps: though the state granted extensions for all California companies impacted by last winter’s storms, S-Corps still need to file in September rather than October along with all other companies.
Don’t hesitate to reach out with any questions — we’re here to help!
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