The disadvantage is not just to early startups. I have ownership in a 9-year old small software company that has never taken investments and has managed to break even or be slightly profitable every year while growing. We reinvest revenue into a team that keeps improving the product.
In 2022 our reported "taxable income" to the IRS skyrocketed because of this rule change. Despite a small profit, we are paying tax on essentially 50% or more of our REVENUE. And because we are a pass-through entity, it pushes us into tax brackets that are quite ae bit higher than corporate tax rates of C-Corps.
2 or 3 years into this we will either have to take a loan to pay taxes, find a way to cut expenses, or (hopefully) grow enough in revenue while not increasing expenses to cover the additional tax.
It really is insanity. Our accounting firm and everyone they spoke with was convinced it would be "fixed" by congress before the final extension deadline a couple months ago. So we waited to the last minute to file, which, of course, resulted in significant late fees and interest on top of everything else.
In 2022 our reported "taxable income" to the IRS skyrocketed because of this rule change. Despite a small profit, we are paying tax on essentially 50% or more of our REVENUE. And because we are a pass-through entity, it pushes us into tax brackets that are quite ae bit higher than corporate tax rates of C-Corps.
2 or 3 years into this we will either have to take a loan to pay taxes, find a way to cut expenses, or (hopefully) grow enough in revenue while not increasing expenses to cover the additional tax.
It really is insanity. Our accounting firm and everyone they spoke with was convinced it would be "fixed" by congress before the final extension deadline a couple months ago. So we waited to the last minute to file, which, of course, resulted in significant late fees and interest on top of everything else.