New Federal Law: Zero Taxes on Gains on Small Business Investments
angelsoft.net
angelsoft.net
1) this is a super loophole for founders. In a new entity, which costs $250 and 1h to set up yourself online, invest $100 to buy your founders shares. Hold for 5 years, sell for $10mm, save $3mm in taxes.
For an entity with multiple founders, I would spend more and get real legal paperwork done, but for a one man corp at an early stage, just be competent.
2) vc investments are not going to benefit, but angel and friends and family can. Biggest issue is no easy way to do convertible debt, but if you want a priced round, go for it. I wish I had spare cash to invest!
3) I see no reason you can't form multiple entities in parallel, as long as they meet active trading requirements. I incorporated several side projects, which probably won't generate more than trivial revenue over the next 5 years as I work on a real startup, but which start the five year holding clock. In five years, or ten, I can take them and try to make real businesses. As five years will have passed, could easily sell whenever. One might also use this for a studio model business, where e.g. each iPad app is a separate corp and may sell independently.
IMO they really didn't think through the consequences of "greater of 10x the basis or $10mm" in the context of founder shares purchased for a trivial amount.
Personally, if you meet the above requirements for an investment, you owe it to yourself to pull any 2011 or 2012 in corps forward to q4 2010. If you feel guilty for avoiding taxes, donate to the program of your choice.
You really should read the text of the actual bill, which starts addressing tax matters on page 51. Alternatively, have your accountant or tax lawyer explain it for you. It modifies the existing rules, which are already complex and require knowledge (or diligent research) of the tax code.
Edit: OK, I suppose it's not that obvious. but if you keep reading, you'd see the next part of the law adds a 5 year carryback for certain small business investments, which is basically a retroactive tax credit allowing some small business investors/owners to get a refund of some taxes paid over the last 5 years. Like, say, capital gains from investment in a small business.
That's not a full explanation (or even a meaningful one), just an example of how different provisions can interact to give results that are no obvious when they're taken in isolation. You should read the whole tax section, there's a lot of interesting stuff in it. Reading bits of laws in isolation from their context often gives a misleading or incomplete picture.
Here's some accessible and more detailed information provided by an accounting firm that provides a better overview of ways this law might benefit startups and self-employed hackers: http://www.mohlernixon.com/informed/2010/09/focusing-on-the-...
For going concerns with profits, sure, the other stuff matters (although I think the more liberalized depreciation, and allowing cellphones to be more easily expensed, is the relevant part). Anyone with enough revenue and profits to care probably has an accountant who is going to handle all of this for him, so it isn't as individual decision centric as the capital gains issues.
The idea is to create a burst of activity this year. It would then be fully attributable to the current congress.
Not much time left at all for that.
I'm saying "If you're going to do this thing posted on HN today, hurry up"
(quoting just a bit of the very detailed GROCO article)
For QSBS purchased between September 27, 2010 and December 31, 2010, a zero percent effective income tax rate will apply to at least the first $10 million of gain upon its ultimate sale if applicable requirements are met. Excluded gain from these investments will not be treated as a preference item for AMT purposes, so the benefits extend equally to AMT taxpayers. ...
If grellas or a competent tax attorney would weigh on in this, it would be most appreciated; I'll donate $100 to the charity of your choice for a published writeup of SBJA2010 QSBS and how it applies to founder shares, sort of a howto, before 15 DEC 2010.
Start-up expenditures.
A certain amount of qualified business start-up expenses may be deductible in the tax year in which the active trade or business begins. The new law increases the amount of start-up expenditures that a taxpayer may elect to deduct from $5,000 to $10,000 for tax years beginning in 2010. The new law also increases the deduction phase-out threshold so that the $10,000 is reduced, but not below zero, by the amount by which the cumulative cost of qualified start-up expenses exceeds $60,000.
http://www.carbis.com/tax/sbja2010.php
hth
The other trick this year is that you can convert 401k and IRA to Roth and split the income over 2011 and 2012 (2 years), or from 2010 forward, effective removal of income limits for Roth. Roth IRAs are awesome if you have really low income a few years (but some savings), and then future much higher income.