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"There's so much for startups in this bill that they need to be mindful of... but you don't know what you don't know."

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Startup Tax Strategy: Navigating New Legislation and Maximizing Credits

Picture this: Two identical startups launch on the same day. Same product, same team size, same funding round. Eighteen months later, one founder is scrambling to find cash to pay an unexpected $50,000 tax bill. The other just received a $75,000 refund check from the IRS.

What made the difference? The second founder understood something the first didn't—and it's exactly what Jake Wedig revealed in our latest Startup Growth Podcast episode.

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The "One Big Beautiful Bill" That Changes Everything

While everyone was debating the headlines around July 4th weekend, smart founders were quietly reading the fine print. This massive 900+ page tax bill—the "One Big Beautiful Bill" (OBBB)—got signed into law on Friday, July 4th after moving quickly through the Senate and House. Jake describes the pace as a blur, noting he wasn't expecting it to move that quickly.

Buried inside are game-changing provisions for startups. Jake, Director of Tax at Fondo with experience at big firms like PwC and years helping startups and founders, warns there's so much for startups in this bill that they need to be mindful of, but you don't know what you don't know.

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Section 174 Nightmare (And Your Wake-Up Call)

Here's what happened to thousands of startups starting in 2022. The 2017 Tax Cuts and Jobs Act included a sunset provision that kicked in after five years. Section 174 turned simple R&D deductions into a cash flow nightmare.

Every dollar you spent on developer wages, contractor costs, hosting costs—everything to build your product—suddenly had to be added back and amortized over five years for domestic activity (15 years for international). Jake explains this is revenue generating because taxes serve two main purposes: incentives and revenue generation.

Jake breaks down the brutal math with a real example: if you had revenue of $300K and expenses of $300K, that add back pushes you right back to $300K of profit, creating a $90,000 taxable income impact after accounting for the half-year convention in year one.

At the 21% corporate tax rate, that's roughly $18,900 in taxes owed. Your R&D credit might be $10,000. Net result: you owe about $8,900 when you used to get money back.

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R&D Credit Gold Mine That's Now Unleashed

But here's where the story gets interesting. Starting with your 2025 tax year, Section 174 capitalization is gone for domestic R&D. This section 174 capitalization is going away for the 2025 tax year.

Every hour your developers spend building features can now generate substantial cash back again without the tax penalty. Jake predicts there's going to be more aggressive claims for R&D credits now that there's not that penalty of add backs.

But here's the kicker: Jake estimates that many eligible startups didn't claim credits aggressively because they didn't want that exposure to 174.

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Amendment Strategy (Or Why You Might Want to Do Nothing)

Here's where it gets tactical. You have options, but they're complex. For amendments, there's a small business exception—Jake believes it's around $31 million in gross receipts that triggers the ability to amend.

But Jake warns about the administrative burden: if you were getting a payroll tax credit, now you have to amend the return to get a refund on taxes paid, then amend the Form 6765, creating a whole snowball effect of complications.

The alternative? There's going to be an offering for catch up deductions next year. Jake's insight: you can either prorate it through one year or two years. The advantage: they're treated as current year expenses. So instead of only getting 80K from NOL limitations, maybe there's 100K of catch up amortization you can use now.

For pre-revenue companies, Jake's advice is simpler: the beautiful thing about pre-revenue companies is these are timing differences or temporary adjustments. You're going to get the benefit of those deductions eventually.

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The International Trap That Could Cost You $200K

Here's a crucial detail most founders missed: international R&D is still going to have the 15-year amortization. That was not included in the reversal.

Jake sees this driving behavior change, questioning whether this will shift innovation to the domestic side versus spending on more cost-effective labor or contractors in different countries.

The math is stark: domestic R&D gets full deductions and credits, while international R&D still gets penalized with 15-year amortization.

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Equipment Timing Secret That Saves Real Money

Bonus depreciation is back at 100%. Jake explains bonus depreciation allows you to take a hundred percent of that expense in the current year, and it doesn't matter if you're a loss business or not.

This differs from Section 179, which got increased from $1 million to $2.5 million in the new bill. But Jake's key insight: bonus depreciation is always going to be the better answer because bonus depreciation can always increase your NOL. Section 179 is limited—you can't go into an NOL with it.

The goal, as Jake puts it: you want to accelerate deductions and defer revenue. If you can accelerate all those deductions now, you can lower your tax bill.

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The QSBS Revolution That Could Save You Millions

Here's where Jake spent significant time in our conversation. The QSBS changes are massive, but there's a crucial timing element: this only applies to stock issued after this enactment.

The exclusion jumped from $10 million to $15 million, but the real game-changer is the new tiered approach. Jake explains it used to be like five years or nothing. Now it's a tiered exclusion where three years gets 50% exclusion, four years gives you 75%, and five years gives you the 100% exclusion.

Jake's perspective: it's allowing people to sell earlier than before. It's meant to get founders to think they can sell a little earlier, hopefully save a little more so they can go into the next big thing.

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Partnership That Changes Everything

Throughout our conversation, Jake emphasized that successful tax optimization requires the right partnership approach. As someone who moved from PwC to focus on being more intentional with clients, he sees founders making crucial mistakes.

The most successful founders treat tax planning strategically, not reactively. They understand that in the startup world, you kind of live and die by that cash balance and burn rate.

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Evolution You Can't Afford to Ignore

Jake's closing insight was clear: taxes evolve. These things happen every five to ten years, usually with a different administration coming in or with sunset rules that happen five years after bills.

His advice: you want to have an advisor that's being agile with the changes and trying to be proactive to ensure you're getting those cash savings you need, especially in a startup environment where cash is king.

The question isn't whether tax laws will keep changing—it's whether you'll be positioned to capitalize on the opportunities when they appear.

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