CFE Supports H.R. 1778, the “American Innovation Act”

The Center for a Free Economy supports H.R. 1778, the “American Innovation Act,” introduced by Cong. Vern Buchanan (R-Fla.) in the U.S. House. This legislation expands first-year tax relief for new businesses and removes an outdated barrier in the tax code that makes it harder to get started.

Entrepreneurs take risks, create jobs, and drive growth. The tax code should support that effort, not slow it down.

What H.R. 1778 Would Do

Under current law, new businesses may deduct only $5,000 in start-up expenses in their first year, with a phase-out beginning at $50,000 in total start-up costs. The remaining expenses must be amortized over time under Section 195 of the Internal Revenue Code.

H.R. 1778 would modernize these limits by:

• Increasing the immediate deduction from $5,000 to $20,000

• Raising the phase-out threshold from $50,000 to $120,000

Eligible start-up expenditures include advertising, employee salaries and benefits, rent, utilities, and other ordinary and necessary costs of launching a new business. A “start up expense” is a cost incurred before a business officially launches. These are the early, front-end investments entrepreneurs must make before revenue begins to flow.

By quadrupling the first-year deduction and expanding the phase-out range, the “American Innovation Act” reflects the real-world costs entrepreneurs face today.

A Reform with Bipartisan Roots

This policy was originally included in Chairman Kevin Brady’s “Tax Reform 2.0” package in 2018, which passed the U.S. House with bipartisan support. The Center for a Free Economy supported that package at the time and supports this renewed effort.

Cong. Vern Buchanan (R-Fla.) and Cong. Mike Kelly (R-Penn.) have reintroduced H.R. 1778 this Congress to restore and expand this pro-growth reform.

Why It Matters

Launching a small business often requires significant upfront investment. Early cash flow can determine whether a business survives its first year.

Allowing entrepreneurs to deduct more legitimate start-up costs upfront does not create a new program or subsidy. It simply lets business owners recover more of their own capital sooner. That improves liquidity, lowers barriers to entry, and encourages job creation.

In a climate of higher borrowing costs and persistent economic uncertainty, practical reforms like this can make a measurable difference.

CFE Takeaway

H.R. 1778, the “American Innovation Act,” is a targeted, pro-entrepreneur reform that updates outdated tax limits and supports small business formation. Congress should advance this bipartisan measure and strengthen the foundation for American innovation and growth.