Letters of Intent

Pankaj Raval (00:04)
Welcome back to Letters of Intent, the podcast built for entrepreneurs, executives, and deal makers. I'm Pankaj Raval founder of Carbon Law Group.

Sahil (00:11)
And I'm Sahil Chaudry corporate attorney at Carbon. Today's episode, we're calling it the big beautiful episode because let's be honest folks, it's tremendous, truly. Some people are saying it might be the greatest episode we've ever done, maybe the greatest anyone's ever The one big beautiful bill. Love it or hate it folks, it's going to impact how you run your company. It's certainly big, but Pankaj is it really beautiful?

Pankaj Raval (00:37)
I love it. love it. my accent's not gonna be as good as yours, but Sahil, it beautiful, it is spectacular, okay? This isn't just a tax code, okay? That's what the losers and the fake news are gonna be calling it. This is gonna be big, it's gonna be beautiful, and it's gonna be the best bill we've ever seen, we've ever drafted. And I've seen a lot of bills.

Sahil (00:40)
You

Well, okay, whether or not you want to award us for our Trump impersonations here, love it or hate it, this bill is here and it's impacting you. If you're a founder, CFO or operator in the trenches, we've done the hard work, we've done the research, this episode is for you.

Pankaj Raval (01:13)
right, All jokes aside, is really important bill and this is reality as much people may want to fight it. This going to be more than a tax code. It's going to be a shift in how you invest in your business, compensate your team, and build equity, and eventually also plan your exit. So let's get into it.

Sahil (01:29)
Okay, let's start with CapEx expensing, which is going to result in immediate cashflow from larger purchases that we haven't seen before. We're starting with a foundational shift with CapEx expensing. The bill brings back 100 % bonus depreciation and expands section 179, expensing to about two and a half million dollars.

Pankaj Raval (01:49)
So for entrepreneurs making capital investments, software, machinery, office upgrades, this means you can write off the entire cost immediately.

Sahil (01:55)
So Pankaj you're saying that founders can front load major spending and instantly reduce taxable income.

Pankaj Raval (02:01)
Exactly. So if you're sitting on to upgrade equipment or invest in infrastructure, this could be a real tip that scales. It's real cash flow acceleration.

Sahil (02:08)
So this is where smart operators are gonna sync tax planning with budget planning.

Pankaj Raval (02:13)
And next up for anyone building product or tech in-house, which is a lot of our clients and a lot of people probably listening, R &D expensing is back.

Sahil (02:20)
Exactly. So under section 110004, you can immediately deduct domestic R &D spend, which you used to have to amortize over five years.

Pankaj Raval (02:31)
Right, So if you start up with an engineering team, a founder building an MVP or a brand running in-house testing, this applies to you.

Sahil (02:37)
Okay, so Pankaj, what's your advice to founders here?

Pankaj Raval (02:40)
So you've got to track qualifying spending aggressively. That means set up categories in your accounting system, QuickBooks, whatever it might be, if needed, and bring in an R &D tax consultant. It's money back in your pocket.

Sahil (02:50)
Okay, so the bottom line is this gives you a way to offset runway burn with tax savings. Your R &D, especially if you're in a business like tech, AI, a lot of our clients are in that business. This is a tax strategy. This gives you a way to offset your runway burn and deduct R &D when you couldn't do it before.

Pankaj Raval (03:10)
Absolutely. Yes, I'll this is this is really important for those startups, which is most of them who are investing in R &D building something. This is a great way to recapture some of those expenses.

Sahil (03:21)
Okay, so now let's talk about QBI and SALT, which is going to result in more take home for founders. Let's talk about how founders and owners actually pay themselves under this bill.

Pankaj Raval (03:32)
Right, so under section 110005, it increases the qualified business income deduction from 20 % to 23%. And under sections 110001, it raises the salt cap to $40,000 for joint filers.

Sahil (03:49)
So if you're operating an S-Corp or LLC, you're keeping more of your earnings plain and simple. You're going from 20 % to 23%.

Pankaj Raval (03:57)
Absolutely. Yeah, this is a big controversy Trump's last tax plan or last bill. it of people in states where they were affected unfairly were really worried about this, states enacted plans to try to get around it. So this is actually something that they're addressing to try to rectify some of the issues that it raised in the last bill. Sorry.

Sahil (04:15)
And actually,

so to compound the savings here, if you're a California founder, which our clients are mostly, there's a California election that pay state income tax, which is federally deductible. But you do have to opt into that annually.

Pankaj Raval (04:29)
Right, it's really important you pay attention to PTET election and the timing of that because you have to make a payment by a certain date. Usually I think it's like June 30th or maybe June payment and I think it's like 50 % your tax could then you can actually use that as a deduction year. But make sure make those payments by the right deadline.

Otherwise, you're going to be foregoing that potential tax savings.

Sahil (04:54)
So to clarify, this means that that tax savings, basically whatever your entity has to pay in state income tax, you can now deduct that amount up to $40,000.

Pankaj Raval (05:03)
exactly. And if you're a pass through that earning over six figures, this should be part of your annual tax No excuses.

Sahil (05:10)
Okay, now we get into one that actually a positive impact here on community, the childcare credits and FSAs. These are benefits that are intended to retain talent, but they are going to help out parents. Section 110020 increases the employer childcare tax credit cap to 600K and raises the credit rate to 50%.

Pankaj Raval (05:33)
Yeah, this is a competitive edge in hiring. So if you're supporting working parents, which I believe we all should personally, think this is of the United States, on a personal level that we don't have enough support working parents, especially working mothers. you are a business that does actually support want to show that you care about these working parents, either through onsite or through partners, you can get a serious tax break.

Sahil (05:57)
Yeah, and starting 2026, dependent care FSA limits go up to $7,500. That gives your team more pre-tax ways to pay for childcare.

Pankaj Raval (06:06)
Absolutely. And so if you're an operator, this is how you retain great talent without raising salary bands. These are the kinds of benefits that show you're building a human first culture.

Sahil (06:15)
We're advising founders to update handbooks and plans now to take advantage of this credit. You don't need to wait until open enrollment. So now we're moving on to the QS BS expansion and that will help you planning for a tax free or at least a lowered tax exit.

we're gonna get into the QSBS exemption. So this is the qualified small business stock exemption, which is really important for our founders, but especially important for investors.

Pankaj Raval (06:43)
Absolutely, so this is really important and something actually I've been able to take advantage of in the past when I've invested in startups. And what section is it raises the QSBS exemption to where it was 50 million as an asset cap to 75 million and the gain exclusion from 10 million essentially to 15 million. So it's essentially introduces as a tiered benefit. you get 50 % of the exclusion after three years.

75 % after four years and 100 % after five years.

Sahil (07:11)
So if you're a founder planning an exit, this could mean millions in tax-free gains if you've structured your equity properly, which goes to the point that your corporate governance is critical here.

Pankaj Raval (07:22)
Absolutely. and you also mentioned the key word there, Sahil, which is structured. It only works if you're planning correctly from day one. That means you have to have a corporation. can't be an S corp. can't be an LLC. You have to have, it has to be part of an original issuance and there has to be a minimum holding period based on these new rules. So don't qualify, if you don't take these steps initially, you're going to forego this exemption and,

you won't be as attractive to certain investors because now they won't qualify for this exemption.

Sahil (07:50)
I think it really goes to the point, I we try to emphasize this with our clients. So many clients think that they can start a company and run without corporate governance documents from the beginning. It's really critical because when it comes time for your exit, which is often the whole reason you're starting the company in the first place, you can really get tripped up if you don't do it right the first time. So that's why we're actually doing QSBS audits for clients before they raise or restructure because if you wait until diligence, it's usually too late.

Pankaj Raval (08:18)
Absolutely, absolutely. And you know, it's not just about tax saving, Sahil. It's about making your company more attractive to investors.

Sahil (08:25)
All right. So let's recap here. This is the big beautiful playbook for our clients, our entrepreneurs, operators. Here's your action plan.

These aren't strategic plays you can run right now. Number one, CapEx planning. Time your major investments to maximize deductions. Number two, R &D tagging. Categorize and claim innovation costs early. Number three, QBI and SALT. Run your tax projections and elect PTET in California if you're eligible. Number four, employee benefits. Add FSAs and childcare credits to retain your talent and just to be a good person.

QSBS strategy, ensure your equity qualifies before you look for investors.

Pankaj Raval (09:09)
And that's it big, beautiful episode. is the hugest of all the episodes, the biggest of them all. And thank you guys for joining. Founders, operators, CFOs, use these tools and let the bill work for you because it's big and it's beautiful and it's here for you.

Sahil (09:25)
We thank you, Pankaj. We want to thank our listeners for listening to, I mean, really, really, you should be thanking us for getting the chance to listen to the greatest podcast of all time. This was big. This was beautiful. This was Letters of Intent, and we'll see you next time.

Pankaj Raval (09:43)
And if you prefer we talk like this for the rest of our episodes, please let us know in the comments. Thank you guys again. This is Letters of Intent. We really appreciate everyone listening. Please like, follow, share for more. And we're going to be keeping you updated on the latest that's happening in this crazy world with one legal issue at a time. Thanks a lot.

Sahil (09:47)
Yeah.