There just might be more incentive for entrepreneurs to launch a startup business in Arizona.
On March 14, the Arizona Senate voted to pass bill SB1559 to reduce taxes for startups and new businesses with an attenuated tax reduction over the course of the first three years in operation, starting with full exemption in the first year, 50% in the second year and 25% in the third year.
In the startup phase of a new venture, especially the first year, there is little to no revenue generated in a business, which means there would not be much taxable income. But, by year three it is presumed a company can gauge whether its business is financially viable, and if so, it would be able to pay taxes by year four.
Gregg Scoresby, founder and managing partner of PHX Ventures, an early-stage Arizona venture capital firm, said he is not an expert on the bill but he did agree most startups aren't making money when they first begin.
“Very few tech startups are profitable in the early years," he said. "Most tech startups building software, for example, don't even have revenue in their first year of operation, let alone profits.”
The bill, which passed along party lines, was sponsored by Republican Sen. Steve Kaiser. Kaiser has experience as a business owner. He formerly owned Junk King of Phoenix, which he sold in 2022 according to a tweet on his Twitter profile.
The impact this bill might have on startups is significant when looking at the survival rate of new businesses. According to March 2022 data from the U.S. Bureau of Labor Statistics, approximately 20% of new businesses fail within the first year. If revenue is generated in the first year, every bit earned would be needed to carry the business over into the next year.
'Every penny counts'
This bill could be helpful for participants of organizations such as the Opportunity Through Entrepreneurship Foundation, which was founded in 2005 to provide training and support to help at-risk youths and adults improve their lives by creating and growing entrepreneurial ventures.
“In most cases, a startup business has limited funding. While most state filing fees are relatively low, every penny counts for a startup, said Joan Koerber-Walker, President & CEO of the Arizona Bioindustry Association and Chairman of the Opportunity Through Entrepreneurship Foundation. “Waiving these fees is helpful for all startups.”
However, this initiative may be less beneficial for startups in niche industries such as biotechnology, which uses biology to develop new products, methods and organisms intended to produce health care-related products.
“Specifically, as applied to our life science and health innovation startups, the income tax subtractions will likely have little impact,” Koerber-Walker continued. “Due to the time required to develop the product and complete the regulatory and reimbursement processes, a health innovation startup is rarely delivering products and in revenue by year three. Thus, they would not receive a tax benefit or qualify for state contracts as set forth in SB1599.”
Scoresby said there could be a better option for new businesses that would alleviate the financial woes that often plague companies in the beginning stages. This is especially true for high-risk businesses that have the potential to yield high earnings such as those in the software sector.
“Tech startups would benefit much more from expansion of the highly successful angel tax credit program ARS 41-1518 than SB1559,” he said. “The angel tax credit encourages more private investment in startups, which directly solves the single biggest problem startups face — access to capital.”
The bill is currently pending in the House Ways and Means Committee. If it passes the House, it will make it to the desk of Gov. Katie Hobbs. The office of the governor was contacted for its position on the bill, but it had no comment.
