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Inflation is Wreaking Havoc on Startups' Runway

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.

Ahmad Ibrahim

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