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Committee hears proposal to let startups sell net operating losses to raise capital; lawmakers request more study
Summary
Lawmakers and witnesses discussed House Bill 11 29, a proposal to allow certain companies to sell net operating losses as a way to raise non-dilutive capital; no committee vote was taken.
House members and witnesses discussed a proposal, House Bill 11 29, authored by Representatives Paul Friel and Jonathan Fritz that would allow certain Pennsylvania businesses to transfer or sell net operating losses to raise early-stage, non-dilutive capital.
Dean Miller, president and CEO of the Philadelphia Alliance for Capital and Technologies (PACT), testified that a NOL-exchange program helps early-stage, R&D-intensive companies convert unused tax attributes into capital. "New Jersey has had a net operating loss transfer program for over 20 years, which has enabled New Jersey entrepreneurs to raise over $1,000,000,000 in non dilutive capital," Miller said, and he cited Celgene as an example of a company that benefited from New Jersey's program in its early history.
Sponsors said the mechanism would lower the cost of capital for startups, help retain companies and talent in Pennsylvania, and attract outside firms. Representative Paul Friel said the policy helps keep companies spun out of Pennsylvania universities and research institutions from relocating to states with more developed capital markets.
Committee members pressed for technical detail. Questions included: how the sale price would be calculated (the session clarified that sellers receive the tax benefit equivalent of the loss multiplied by the corporate tax rate), annual and lifetime caps (the analysis cited an annual seller limit of $5 million per taxpayer and a programwide cap provision; the bill text in committee materials proposed a $100 million program cap and a buyer-side annual cap of up to $200 million of losses), and which agencies would administer the program (the bill proposes joint administration by the Department of Community and Economic Development and the Department of Revenue).
Some members expressed concern about complexity and precedent: Chair Griner said she struggled with administrative mechanics and fairness and noted only New Jersey currently operates a similar program. Other members recounted the loss of local firms and talent to out-of-state markets and said the program could reverse that trend.
The committee did not take a vote on HB 11 29 during the session. Members asked for additional input from DCED and Department of Revenue staff and encouraged sponsors and stakeholders to continue discussions on caps, administration, and eligibility.
Technical clarifications recorded in committee testimony: example calculations equate the taxable benefit to the seller as the NOL amount multiplied by the applicable corporate net income tax rate (discussed at the rate the CNIT will be when the transfer occurs); seller-side annual cap proposed at $5,000,000 per taxpayer; program cap discussed around $100,000,000; buyer-side purchase capacity of up to $200,000,000 of losses per year was mentioned in discussion; proposed administration by DCED in coordination with Department of Revenue.
