Comment by pclmulqdq
3 years ago
This also looks like it completely screws people who get government research grants for their for-profit companies (eg SBIRs). When I was thinking about one, my accountant was telling me that the grant is technically revenue, which would make it convert to taxable income less expenses. Forcing companies to capitalize R&D basically means that you have to pay tax on the grant funding first, leaving only the after-tax value of the grant for actual R&D.
I doubt most grant proposals have a 20-30% haircut built into the budget like that...
Yup, I am screwed because I got an SBIR grant in 2022. The default indirect cost rate is ~30%. In this new scenario, it should be something more like 60%, which reduces the usable funds that can be spent on actual development (IF you can even get a high rate like that approved by the govt agency)
EDIT: By "screwed" I mean that I'm facing a $100k personal tax bill because the company is an LLC taxed as an S-Corp. You can say all you want about lack of planning, etc, but the reality is that many times very small business do not have the budget for a high-end business accountant on retainer. If I were to try to "plan better" to avoid this situation, I would have just not written the grant or tried to do any of it and gotten a FT job or something instead. It's an innovation-killer.
I am personally very happy that my LLC's SBIR grant proposals in 2022 were all turned down, because I wasn't thinking about the disastrous tax consequences.
Right? Like, should I even bother applying for Phase II in September? There is no way I could afford to pay taxes on $1.8M.
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Which agency is this from? 30% is an insanely low indirect rate. My experience comes dominantly from DoD SBIR, where for Phase I's you propose your own indirect rate.
But yes, this law is awful for SBIR companies, because we're forced to give a giant out of pocket interest-free loan back to the gov
NIH, it's 32%. You can negotiate a custom one somehow, but I haven't waded into those waters yet.
I'm guessing this was NSF or HHS, both of which have tons of rules. DoE and DoD are much less controlling.
NSF has safe harbor of fringe + indirect @ 50% of salary, IIRC.
They are indeed hard hit as well. SBIR grant awardees sent their own letter to Congress about this a month ago: https://sbtc.org/sbtc-letter-to-congress-on-sec-174-tax-conc...
> I doubt most grant proposals have a 20-30% haircut built into the budget like that...
Most university research budgets do yes, and actually more than that.
Universities already have their indirect cost rate negotiated (most are like 80-120%). Default for newcomers is around 30%, until you can build up the history and wherewithal to navigate the negotiations for establishing your own rate.