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.
IMO you should talk to an accountant. It's pretty cheap to do that in comparison to the tax bills (my accounting bills are <$1000/year for a similar situation to you). Phase II is a lot of money, and you may be able to get some venture debt now that you're past Phase I to cover what the SBIR doesn't (ie the taxes). There's also some chance that the law around this will be reversed.
No, it adds a huge burden. It's already eaten up a large amount of my bandwidth. If they don't repeal it I also have to get some kind of VC or other debt funding, which is by no means guaranteed. Not to mention that writing these grants is not inconsequential in terms of effort in the first place. At any point the added strain and uncertainty could force me out of business.
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
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.
I doubt most grant proposals have a 20-30% haircut built into the budget like that...