The Big Story: Congress eyes key startup tax priorities
As Congress kicks off the process to pass sweeping tax reform, startup tax priorities are back in the spotlight, including possible efforts to make it harder for startups to attract early employees and investors. Among the policies up for debate are the tax treatments of Qualified Small Business Stock (QSBS), which helps startups attract investment and talent, and carried interest, which incentivizes fund managers, including emerging managers, to continue supporting early-stage companies. As those conversations heat up, Engine and other startup ecosystem organizations have launched the Innovator Alliance, a new coalition dedicated to advancing tax policies that fuel innovation, drive investment, and expand opportunities for startups across the U.S.
QSBS provides preferential tax treatment for capital gains for shareholders—including employees—in certain startups, who hold equity for at least five years. This makes startups a more attractive investment opportunity and helps founders attract early talent. Carried interest tax treatment links fund performance with a fund manager’s compensation, and it is an important tool in incentivizing investors to fund startups—especially emerging fund managers, who are often diverse investors that fund diverse founders. Weakening or eliminating these provisions would shrink the capital available to startups, forcing entrepreneurs to depend on more expensive or less flexible financing options.
Policymakers kicked off the process that would lead to tax reform when Congress initiated the reconciliation process this week, a vehicle that requires only a simple majority to pass the Senate. Rep. David Kustoff (R-Tenn.) also moved to bolster QSBS tax treatment by re-introducing the Small Business Investment Act of 2025. As policymakers work through the tax reform process, they should focus on preserving, and in the case of QSBS, expanding incentives for startup investment and growth.
Policy Roundup:
House passes legislation to repeal beneficial ownership reporting extension. The House advanced legislation in a bipartisan vote last Tuesday that would grant small businesses formed before Jan. 1, 2024, a one-year extension to comply with the Corporate Transparency Act—a law that requires companies to disclose beneficial ownership information to the government. This legislation would help startups, who may face significant challenges in navigating new regulations and managing associated compliance costs.
Lawmakers move to repeal rule burdening startup exits. Rep. Scott Fitzgerald (R-Wis.) introduced a Congressional Review Act resolution last Tuesday to overturn the Federal Trade Commission's rewrite of the premerger notification. Engine joined a coalition of industry organizations supporting the resolution, writing that acquisitions spur innovation, and startups “benefit from opportunities for capital formation, liquidity, and growth, as well as the possibility of a future exit.”
Court ruling on AI copyright raises questions for startups. A Delaware district court judge rejected legal AI startup Ross Intelligence’s fair use defense last Tuesday for using Thomson Reuters’ copyrighted materials in their AI training. While the facts of the case hinge on Ross Intelligence’s exclusive use of copyrighted content, the ruling demonstrates how fair use may be assessed in ongoing AI copyright lawsuits, emphasizing the need for clearer guidance, as costly copyright litigation can be devastating for startups.
House policymakers renew push for federal data privacy framework. The House Energy and Commerce Committee Chair Rep. Brett Guthrie (R-Ky.) announced the formation of a working group last Wednesday, signaling a renewed push for a federal data privacy framework. Over the past several years, in the wake of federal inaction, many states have enacted unique data privacy laws, creating an increasingly costly regulatory patchwork that startups must navigate. A federal framework is needed that ensures uniformity, promotes clarity, limits bad faith litigation, considers startups’ resources, and recognizes the interconnectedness of the startup ecosystem.
On the Horizon
WED. 02/19: The Senate Judiciary Committee will convene a hearing to discuss potential requirements for Internet companies that deal with young users at 10:15 AM ET.
WED. 02/19: The Senate Committee on Commerce, Science, and Transportation will convene a hearing to discuss the Federal Communications Commission’s auction authority lapse and expanding commercial spectrum.
Startup Roundup:
#StartupsEverywhere: Durham, N.C. With a background in economic development and a startup itch, Lauren McCullough co-founded Tromml, helping the automotive industry understand sales dates. We sat down with her to discuss her company, the role of open source in AI, navigating intellectual property rights, and more.
