July 23, 2025 By Dan Fiebelkorn and Kelsey Boussie

Investing After the Update: Tax Trends Redefining the Startup Ecosystem

Recent tax legislation introduces several updates with significant implications for the venture capital ecosystem. From expanded deductions to changes in reporting thresholds and Qualified Small Business Stock (QSBS) treatment, these updates aim to improve cash flow and create opportunities for long-term tax efficiency, while also adding new layers of complexity in some areas.

Below is a summary of the key changes:

Increased 1099 Reporting Threshold

The reporting threshold for payments made for services (typically reported on Forms 1099) will rise from $600 to $2,000 starting in 2026. This change, which will be indexed for inflation beginning in 2027, reduces the administrative burden for startups and small businesses by limiting the number of 1099s required for low-dollar payments.

Carried Interest and Capital Gains Remain Unchanged

There are no new provisions affecting the taxation of carried interest, which will continue to be taxed as long-term capital gains. Likewise, capital gains tax rates remain unchanged—an important win for VC firms and founders anticipating taxable events upon exit.

Enhanced Pass-Through and Bonus Depreciation Incentives

Several provisions are aimed at boosting investment and improving cash flow:

  • Bonus Depreciation is restored to 100% through 2029, allowing startups to expense capital investments immediately.
  • Section 179 Deduction limits have also been expanded, increasing the amount small businesses can deduct for qualifying purchases.
  • The Section 199A Pass-Through Deduction has been made permanent and increased from 20% to 23%, benefiting pass-through entities common among early-stage startups.
Improvements to Interest Expense and R&D Expensing

Changes to interest deductibility rules provide greater flexibility for leveraged startup growth. Additionally, R&D expenses can once again be fully expensed, thereby improving cash flow and reducing the tax burden on technology- and innovation-driven companies.

Increased Compliance Burden for Foreign LPs

New withholding tax provisions targeting discriminatory foreign taxes may impact foreign limited partners. These rules could lead to increased compliance requirements and may affect the net returns of non-U.S. investors participating in U.S. VC funds.

Expanded QSBS Benefits

One of the most impactful changes for startup founders and early stage investors is the expansion of the Qualified Small Business Stock (QSBS) exclusion:

  • The capital gain exclusion is now phased: 50% for stock held at least 3 years, 75% at 4 years, and 100% at 5 years.
  • The exclusion cap increases from $10 million to $15 million.
  • The asset threshold for qualifying companies rises from $50 million to $75 million.

These new provisions apply only to stock issued after the enactment date, while existing QSBS rules remain in effect for previously issued stock.

Key Takeaway

These tax changes offer significant advantages for startups and venture capital firms, particularly in terms of cash flow, investment incentives, and long-term benefits. At the same time, new rules—especially those affecting foreign investors—introduce additional complexity. Now is the time for founders and investors to revisit their tax strategies with advisors to ensure they’re positioned to benefit from the new landscape.

This article is for informational and educational purposes only and does not constitute legal, tax, or investment advice, recommendations, or a solicitation. This article may contain forward-looking statements that are not guarantees of future performance. Tax laws are complex and their application is highly dependent on the specific facts and circumstances of each individual or entity. The views expressed are the personal opinions of the authors and do not necessarily reflect the official position of Solyco Capital. Readers should not act or refrain from acting based on this content and must conduct their own research and consult with qualified legal, tax, and financial professionals before making any business or investment decisions. Past performance is not indicative of future results.

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