Startups often operate at a loss, but a Pennsylvania bill aims to help them turn those losses into funds they can use to grow.

Introduced in April by state Rep. Paul Friel, Pennsylvania House Bill 1129 would create a net operating loss (NOL) transfer program, allowing tech and biotech startups to sell their unused tax benefits to profitable companies in exchange for capital.

Rather than relying solely on money from investors, the NOL transfer program would let startups leverage existing tax benefits. That added flexibility could help them stay afloat, particularly for early-stage companies or those with high research and development costs.

With neighboring New Jersey already offering a similar program, now may be the time for Pennsylvania to act, according to Dean Miller, president and CEO of the Philadelphia Alliance for Capital and Technology. The program, he said, would give the state a competitive edge by helping to retain and attract growing companies.

But the bill hasn’t seen movement since July and remains stuck in committee, with no vote scheduled. If it advances, the current legislation includes restrictions on who can apply, how much they can receive and how the funds can be used.

Keep reading for a breakdown of how NOL tax laws work, what HB 1129 proposes and ways that startups can prepare.

➡️ Jump to a section:
• What are NOL transfer programs?
• How have NOL transfer programs played out in New Jersey?
• What would the program look like under PA House Bill 1129?
• What are the benefits?
• Who would qualify?
• What oversight or audits will be in place?
• What penalties or restrictions does HB 1129 introduce?
• How does HB 1129 fit into existing NOL limitations?
• What possible drawbacks are there?
• How close is PA House Bill 1129 to being enacted?

What are NOL transfer programs?

When a company spends more money than it makes, it incurs an NOL. The NOLs are carried forward for when the company becomes profitable, when it can later use the losses to reduce tax bills. But for early-stage companies, especially in capital-intensive industries like tech and biotech, profitability might be years away.

An official net operating loss transfer program allows eligible companies to sell the tax benefit of their losses to profitable businesses, often in exchange for cash. That money can be used immediately — for things like hiring, research, product development or general operations — offering a non-dilutive alternative to raising venture capital.

“You gotta have some incentive that says if I spend all this money and I lose all this money, someday, I’m going to be able to offset taxes,” Miller said.

How have NOL transfer programs played out in New Jersey?

New Jersey has had a NOL transfer program for over 20 years called the Technology Business Tax Certificate Transfer Program. This program allows tech and biotech companies in the state to sell their NOL tax benefits for at least 80 cents per dollar of the NOLs’ value. 

New Jersey-based Agile Therapeutics was selected for New Jersey’s program six times, receiving about $20 million total over the years, former CEO Al Altomari told Technical.ly. 

This money helped fund the biotech’s clinical trials and helped keep the company afloat while waiting for FDA approval of its product, he said. 

Having additional funding also took some of the pressure off of raising from investors, Altomari said. It showed that the company had money coming in from a variety of places. 

“It gives you some leverage, and some opportunities to time when you raise,” he said. “It gave us some credibility.”

What would the program look like under PA House Bill 1129?

Companies that want to buy or sell NOLs would apply for the program through the PA Department of Community and Economic Development (DCED) and the Department of Revenue, according to the bill. 

Sellers must state how much in NOLs they want to transfer and purchasing companies must agree to pay at least 80% of the NOLs value. The state government would oversee these sales.  

The application would require a $3,500 nonrefundable fee. The seller would need to provide financial statements, proof of its eligible NOLs and a plan for how it will use the money it makes from the sale.  

If the seller previously participated in the program, it would have to explain how it used the funds. The money would have to be used for expenses like research and development, employee salaries and workspace, for example. 

The purchasing company would need to share how much in tax benefits it’s seeking, how much it’s willing to pay for them and financial statements. 

What are the benefits?

Most startups don’t ever become profitable, so they can’t do anything with the NOL tax benefits they have, Miller said. 

However, if the company can sell its NOLs, it would receive additional funding that doesn’t involve debt or equity in the company. This kind of funding is especially valuable during times when it’s hard to raise funds from investors, like the Philly region is currently experiencing, according to Miller. 

The overall goal of a program like this is to keep and attract companies to operate in Pennsylvania, according to Miller. 

“You want a high-potential company that’s investing a lot of money in R&D to get this, because they’re developing new products and they’re hiring people,” Miller said. “This is about both solidifying and growing high-wage jobs.”

Who would qualify?

Technology or biotech companies that are located and operating in Pennsylvania would qualify for the proposed program. The companies must also:

  • Be in business for seven years or less;
  • Employ at least 30% of their US full-time workforce in PA;
  • Have no positive net income in the last two years;
  • Meet specific criteria for intellectual property and revenue.

What oversight or audits will be in place?

Every year, the DCED would have to produce a report explaining the reach of the program and how many NOLs were sold and bought, according to the bill. The report would also need to assess how well the program is running and make recommendations for improvements. 

What penalties or restrictions does HB 1129 introduce?

The program would have an annual cap on how many NOLs can be sold across the state. According to the bill, Pennsylvania would approve up to $200 million in NOL transfers each year.

Individual companies would face their own limits. Each one could sell up to $5 million in NOLs per year, but that number is capped at selling $20 million over the lifetime of the company.

Startups that receive funds from selling their NOLs must follow the program’s rules. If they misuse the money or leave Pennsylvania within five years, they may have to pay some of it back to the DCED.

There are also penalties outlined in the bill if companies apply for the program with false information, including possible fines and jail time. 

How does HB 1129 fit into existing NOL limitations?

This bill is Pennsylvania’s latest effort to use NOLs to reduce state income tax bills, a tactic to make the state more attractive to businesses. 

Last year, Pennsylvania’s government approved a bill that increased the percentage of income NOLs can be applied to. Previously, companies could only deduct 40% of taxable income using NOLs. Under this new law, the percentage will increase 10% every year until it reaches 80%, matching the federal limit.  

This program would only impact PA state income taxes and companies would still follow federal NOL guidelines for federal income taxes. There is currently no federal NOL transfer program like the one proposed in the bill, but the IRS offers guidelines for NOL transfers in special cases like mergers or acquisitions.

What possible drawbacks are there? 

This type of program would result in Pennsylvania getting less tax money from profitable companies, which could impact budgets, Miller said. 

The program also requires strict guidelines and restrictions from the state government to ensure only eligible companies are applying and that the money is being used to help the companies grow. 

How close is PA House Bill 1129 to being enacted?

The bill is currently on hold, with no hearings or votes scheduled since it was amended by the House Finance Committee on July 1.