How Will the Fiscal Cliff Moves Affect Silicon Valley Entrepreneurs?

by Nick Trenchard | January 2, 2013

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In a last-ditch effort to stave off the looming fiscal cliff, the house agreed to prevent deep spending cuts and massive tax increases across the board in a brokered Senate compromise that could leave Silicon Valley entrepreneurs with mixed reactions.

At first glance, the compromise between lawmakers will both promote and deflate entrepreneurial businesses and startups going forward.

Lawmakers first opted to increase tax rates on the wealthy (or families who earn more than $450,000 and individuals who earn more than $400,000), further inflating their tax rate from 35% to 39.6%, but will raise over $600 billion over the next 10 years. Still, this gives little incentive for business owners to flourish in this state of the economy. However, the Bush-era cuts — the wealthy who earn less than $450,000 in family income or $400,000 individually — will continue on.

Other brokered deals include the much-loved Research and Development (R&D) tax credit, which incentivizes research-oriented hiring, something Silicon Valley entrepreneurs have taken quite seriously the last decade. In fact, there’s widespread evidence that R&D spurs much innovation in the Silicon Valley area.

“A consensus has formed around the view that R&D spending has a significantly positive effect on productivity growth, with a rate of return that is about the same size as (or perhaps slightly larger than) the rate of return on conventional investments.”

President Obama had a moment to sound off on the passing of the highly-praised bill on Wednesday.

“We can’t keep cutting things like basic research and new technology and still expect to succeed in the 21st century economy,” the president said following the passage of the “fiscal cliff” agreement.

Startups can also earn a steeper tax break if they utilize the Work Opportunity Tax Credit (WOTC) program, a tax incentive given to firms who hire underemployed groups such as veterans and youth. The tax break also incentivizes firms to embrace renewable energy technologies, one of the more easily accessible options for companies in the Silicon Valley area.

The Senate, however, could not reach an immediate deal on government spending cuts. However, the government did place an additional two month extension on the vote in order for both sides to firm up a deal. Though, if lawmakers still can’t reach an agreement by March, it could hurt both federal contractors and the entrepreneurs that utilize them.

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