HR 1778119th CongressIn Committee

American Innovation Act of 2025

Introduced: Mar 3, 2025

Standard Summary

Comprehensive overview in 1-2 paragraphs

The American Innovation Act of 2025 would overhaul how start-up and organizational costs are treated for federal income taxes in order to encourage new business formation and growth. The core change is to replace the longstanding general rule that these costs are not deductible unless a taxpayer elects a special arrangement. Under the bill, eligible start-up and organizational expenditures can be deducted up front (subject to a cap) in the year the business begins, with any remaining costs capitalized and amortized over 180 months. The bill also adjusts rules for partnerships and S corporations, disregarded entities, and inflation-indexed thresholds. In addition, it introduces protections for start-up losses and credits when ownership changes occur, and adds a rule restricting certain syndication fees from deduction. Taken together, the proposal is designed to lower the upfront after-tax cost of starting a business, while spreading the remaining costs over time and providing transitional rules around losses and credits. Key elements include (1) a one-time upfront deduction option with a cap and phase-out, (2) broader applicability to various business structures and a simplified election process, (3) transitional rules to preserve start-up net operating losses and credits after ownership changes, (4) limits on deducting syndication and related “promotion” fees, and (5) inflation adjustments to thresholds starting years after 2026. The effective dates place the start-up deduction changes on expenditures for new businesses beginning after 2025, with related NOL/credit rules applying to different, earlier timelines.

Key Points

1Start-up and organizational expenditures deduction expansion
2- Taxpayers may elect to deduct in the year a new active trade or business begins an amount up to the lesser of (i) the total start-up and organizational expenditures or (ii) $20,000, reduced by the amount that expenditures exceed $120,000 (with a floor at zero). The remaining costs are capitalized and amortized ratably over 180 months starting from the month the business begins.
3- For organizational expenditures, the definition includes costs tied to forming a corporation or partnership and those that would be amortizable if the entity had a determinable life. The rule also applies to single-owner disregarded entities as if they were corporations.
4- Inflation adjustments begin after 2026, increasing the $20,000 and $120,000 thresholds and rounding to the nearest $1,000.
5- The election is made at the entity level for partnerships and S corporations.
6Transition and conforming changes
7- The bill repeals certain existing provisions (notably section 248 and related references) and reworks numerous cross-references so that start-up and organizational expenditures are governed by new Section 195 rules.
8- It updates the treatment of startup costs in other parts of the code to reference 195 rather than the repealed provisions.
9Treatment of syndication fees
10- Section 709 is amended so that partnerships and partners cannot claim a deduction for amounts paid to promote or sell an interest in the partnership (the “syndication fees” rule).
11Preservation of start-up losses and credits after ownership change
12- Section 382 is amended to treat start-up losses differently when there is an ownership change. Start-up net operating losses (NOLs) arising in a start-up period may be adjusted to account for the net start-up loss in light of an ownership change, with detailed rules defining the start-up period and how the loss is allocated.
13- A new subsection under Section 383 (now subsection (e)) creates an exception for start-up excess credits, reducing unused general business credits in proportion to the startup period’s credits as they relate to the startup trade or business.
14- The start-up period for purposes of these rules is defined as a specific three-year window surrounding when the trade or business begins as an active trade or business, with a transition date anchored to January 31, 2026.
15Effective dates
16- The start-up and organizational expenditure changes apply to expenditures paid or incurred in connection with active trades or businesses beginning in tax years starting after December 31, 2025.
17- The NOL/credit preservation provisions apply to taxable years ending after January 31, 2025 (and certain transition provisions apply to the start-up period as defined).

Impact Areas

Primary group/area affected- Startups and small businesses (including sole proprietors and new corporations/partnerships) that incur start-up and organizational expenditures, as well as disregarded entities (single-owner entities treated as corporations for tax purposes).- Taxpayers that would benefit from an upfront deduction rather than a full immediate deduction only if they meet the caps, with the remaining costs amortized over 15 years.Secondary group/area affected- Partnerships, S corporations, and other pass-through entities due to entity-level election mechanics and changes to how organizational costs are treated across entity types.- Corporations undergoing ownership changes that trigger Section 382/383 rules, since the bill adjusts how startup losses and credits are treated after such changes.Additional impacts- Tax practitioners and corporate/commercial finance teams will face updated compliance requirements, new election procedures, inflation-indexed thresholds, and transitional rules to preserve prior losses and credits.- The broader economy could see a marginal effect on the cost of starting new businesses, potentially encouraging more entrepreneurship, especially for smaller startups with modest start-up costs.Start-up expenditures: Costs incurred to create a new business before it starts active operations (e.g., market research, testing, and other pre-opening costs).Organizational expenditures: Costs incurred to form a corporation or partnership (e.g., legal fees, state filing fees, and other formation costs).Amortization: Spreading a cost deduction over a set period (here, 180 months or 15 years) rather than taking it entirely upfront.Active trade or business: The point at which a new business begins operations and earns ordinary income.Section 382: A provision that limits the use of net operating losses and certain tax credits when a company undergoes an ownership change.General business credits: A category of tax credits (e.g., investment, research) that can offset tax liability. The bill includes a mechanism to adjust these credits in certain startup contexts.Syndication fees: Fees paid to promote or sell an interest in a partnership; the bill restricts deductions for these fees.

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