MCB Accounting Blog

Schedule a Meeting:

Capital Gains Tax Exemption Could Be Good for Startups

Posted At : February 9, 2012 5:33 PM
| Posted By : Nancy Coffman
Related Categories: Closely Held Business, Private Equity-SBICs and Venture Capital

Eliminating capital gains taxes on investments in startups could help these companies raise up to an additional $7.5 billion over ten years, according to an analysis by the Kauffman Foundation, which specializes in entrepreneurship. This report is timely because there is legislation pending in Congress that would permanently eliminate capital gains taxes on investments in C corporations with less than $50 million in assets.

Kauffman's estimate of how much additional investment this tax break would generate is based on how much money venture capitalists, angel investors and entrepreneurs themselves currently invest in startups. In 2010, that amount was around $10 billion. Exempting these investments from the current 15 percent capital gains tax rate should lead to a 7.5 percent increase in total investments in startups.

Measures that would lead to more investment in startups should lead to the launch of more high-growth firms and boost the odds that they will reach the growth phase and create jobs. This growth is key because startups contribute the vast majority of net new jobs created in the U.S. economy.

Until 2009, taxpayers could exclude 50 percent of their gains from the sale of stock in qualified small businesses from capital gains taxes. This amount was increased temporarily to 75 percent, then additional legislation raised it to 100 percent for stock in qualified small businesses acquired before the end of 2011. This small business stock must be held for five years in order to qualify for the tax break, making it hard to tell how much additional investment was generated.

President Obama has proposed additional enhancements to make these investments even more attractive: making the capital gains tax break exempt from the alternative minimum tax and giving investors six months to roll over their gains into new investments in small businesses.

Click here for the complete Portfolio.com article.

MCB has over 40 years of experience serving Private Equity and Venture Capitalists with accounting, tax, audit, due diligence and consulting services. Contact Matt Dwyer at 703.218.3600 to start building a relationship with a CPA firm who strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.