Code Section 1202: Let’s Hope It Doesn’t Expire | Startup Company Law Blog | Davis Wright Tremaine LLP

Code Section 1202: Let’s Hope It Doesn’t Expire | Startup Company Law Blog | Davis Wright Tremaine LLP (LINK)

'via Blog this'

Joe makes some great points, but another reason is that many investors are just beginning to learn about Section 1202 and make plans that allow them to take advantage of it.

Let's face it, people don't usually live and breathe the tax code and many people didn't immediately realize (and many probably still don't) that the 100% exclusion even existed, so it is necessary to leave it in place for a reasonable length of time in order for it to have the intended effect.

Gov. Haslam: TN to co-invest via INCITEinnovation and jobs-formation campaign on Venture Nashville

Although I'm thrilled to hear about these kind of initiatives in the Southeast, I would really love to see some in my home state for a change.

CAPCO all by itself, although great, is just not enough.

Gov. Haslam: TN to co-invest via INCITEinnovation and jobs-formation campaign on Venture Nashville

GOVERNOR Bill Haslam's new $50 million INCITE economic-innovation program will include co-investment for Tennessee ventures, new incubators, a push on both tech transfer and entrepreneurship, and a continuing role for Tennessee Technology Development Corporation (TTDC) and other allies, the governor said today.

Misguided Nebraska Senators question angel tax credit benefit due to business risk

The legislative debate over the Nebraska Angel tax credit is instructive for Alabama because we will probably have some of these same issues raised when the (hopefully soon to be introduced) Alabama angel tax credit is debated.

Nebraska Senators question 'Angel' tax benefit - Omaha.com

Lincoln Sen. Danielle Conrad, who led a legislative study last year on how to improve the “economic ecosystem” for entrepreneurs, said Nebraska has done well attracting larger businesses but needs to be just as aggressive helping innovators capitalize on a good idea or a new invention.

But Schuyler Sen. Chris Langemeier questioned whether the state should spend $3 million on such tax benefits when it is cutting spending elsewhere.

He called LB 389 “a slot machine.” Research shows that up to 75 percent of such projects fail.

“I’m not against this. I just don’t think today is the day to make this investment,” said Langemeier, who drafted an amendment to kill the bill.

Senator Langmeier is probably a very smart and hardworking individual, but his comments are laughable.  There are no doubt risks for the success of an angel investor tax credit, but the good Senator is missing them.  Calling an angel tax credit proposal a "slot machine" simply because many small businesses eventually fail completely misses the point...and the point IS that 25% of them succeed (by his statistics).  Of those succeeding, some are also going to succeed in a large way and that is exactly what makes the entire process profitable for entrepreneurs, investors and the State.   If the Senator's reasoning were followed then no one should ever start a new business.

Nonetheless, to a certain extent he is exactly right, because the law of large numbers is critical to angel investing just as in casinos*...only he has the parties wrong because in an angel tax credit the State is playing the role of casino, not player.  *(meaning, like individual bets, it takes investment in a lot of individual companies to normalize the overall portfolio return) In fact, based on some table napkin math, the State stands to create a tremendous capital multiplier by increasing the creation of high growth startups (see prior posts).   The only real limitation on the upside is the State's ability to keep supplying potential investors with high quality candidate companies able to appropriately use investment capital and that is a risk worth talking about and trying to mitigate, but that is for another post.

Entrepreneurship and Taxes (link)

Scott does a good job of not just stating his opinion, but also attempting to make sure that his opinion has a basis in verifiable fact and he has some great points about our current Congressional decisions on the Bush era tax cuts.

Entrepreneurship and Taxes by Scott Shane

"The United States has an enormous budget deficit, which may require tax increases to close the gap. But we need to carefully consider the law of unintended consequences when raising taxes. Much evidence shows that higher taxes discourage entrepreneurial activity, including investment and hiring by small business owners. If we let the Bush tax cuts expire, we risk shutting off already weak small business hiring and investment. Is that possibility really worth the relatively small reduction to the deficit that we might derive from a tax increase?"

As an aside, Scott also has a good book out on angel investing too...think Freakonomics for angel investors. Of course, my favorite quote being:

"Particularly promising are angel groups, which pool knowledge and money for wiser and more productive investments. In groups, angels can rely on each other's expertise, share the labor of performing due diligence, and generally insure that their money is being placed--and used--wisely. Fostering the formation of such groups may be the single most important thing that government can do to boost angel investing."

Capital gains tax exclusion in Small Business Jobs Act signed on Monday (27th)

The Small Business Jobs Tax Relief Act of 2010, signed into law on Monday Sept. 27th, increases the exclusion from gross income for the gain from the sale or exchange of "qualified small business" stock (aggregate gross assets not in excess of $50 million) acquired after enactment and before January 1, 2011 from 50% to 100% if held for 5 years.  


Admittedly that may sound like a bigger deal than it turns out to be because qualifying investments already had a fairly low tax rate, but it is still something to think about when considering a small business investment (or angel investment).

Citique/Analysis of Georgia Jobs Bill of 2010 (HB 1023)

I have had several people ask about the Georgia Angel Tax Credit bill since the BBJ article, so I thought this was as good of a place as any to cover it.

Georgia HB 1023 - Jobs, Opportunity, and Business Success Act of 2010 also known as the Jobs Bill of 2010 is designed to use tax credits, cuts and incentives to create, expand and attract new businesses. The bill has several parts, namely:

1. Creation of the “Year for Georgia Entrepreneurs”: Allows Georgians the opportunity to start a new business with no state fees.

2. “Angel Investor” Tax Credit: An income tax credit of up to 50% of an investment made in small or start up businesses with 20 or fewer employees. The income tax credit would be available 2 years from the date of investment. The total “Angel Investor” tax credit pool would be limited to $10 Million per year (adjusted for inflation) and dispensed on a first come-first served basis.

3. Quarterly Credit Towards Unemployment Insurance Tax: For each eligible employee hired who is receiving State Unemployment benefits, a company will receive a $25-125 quarterly credit towards their unemployment tax.

4. $2,400 Tax Credit for the Hiring of the Most Difficult to Employ: Any Georgia company which hires a person, in a net new job, who has been eligible to receive unemployment benefits for at least 13 weeks, can receive a tax credit of $2,400 after 24 months of consecutive employment.

5. Elimination of the Net Worth Tax: The net worth or intangible tax (held over from a 1930’s law and only retained by a handful of states) that taxes wealth accumulation is eliminated.

6. A Triggered 50 Percent Reduction of the Capital Gains Tax for all Georgia Taxpayers: Georgia currently has the 15th highest Capital Gains tax in the country and the 2nd highest in the Southeast, with two neighboring states at 0%.


My Thoughts -

I like the elimination of the state fees for creation of an entity, that is a small hurdle, but can be a big deal to small businesses and I think most businesses would be better served in a liability limiting entity rather than as a sole proprietorship.

I would like to see some narrowing of the "qualifying business" definition for purposes of the angel tax credit, mainly to include some version of a related party exclusion. Otherwise, I think it is at serious risk of being somewhat wasted and used in intra-family gifting/estate planning strategies.

Also, the new jobs creation/hiring credit is probably a bit ill conceived, since I doubt many small businesses will let a $2400 tax credit (or similar stipends) drive hiring decisions.

Overall though, Alabama could well use a similar bill and it takes guts to make a proposal (any proposal) because it is some much easier to sit on the sidelines and complain. We should support those that are trying to come up with good solutions and applaud those efforts.

The time may be NOW for Alabama to become a new economy leader

Interesting timing of my last post.  The 2010 Silicon Valley Index was just released and already national publications are pointing to it's rather shocking reference of Huntsville, Alabama as a potential competitor to Silicon Valley, due to Huntsville's strong position in Federal procurement.

See:  Business Week and Wall Street Journal Articles

Of course, that bold prediction can not come to significant fruition unless Alabama takes a more proactive role in understanding the oportunity that is available and providing appropriate resources and support.

Some of the challenges include:

1.  Shortage of seed/startup stage funding
2.  Lack of a large local biotech company to commercialize local medical university innovations
3.  Connecting the managerial and innovation talent to the opportunities
4.  National perception

There are certainly more challenges than those above, but those are some of the big ones.  But, they are not insurmountable if our local and state leaders (both public and private) really want to tackle the issues that can help drive Alabama forward.

Time for an Alabama Angel Investor Tax Credit and maybe more

Alabama's economy ranked dead last in Economic Dynamism according to the 2009 Astra report.   That rank was not much better in the other entreprenurial indicators.  This is despite ranking 21st in Federal R&D expenditures at colleges and universities.

To be sure Alabama has made some significant strides in economic development.  The auto industry has certainly been a good catch for Alabama's EDO.

Also, in February 2004, the Alabama Certified Capital Company Program (CAPCO) created six new private equity funds. As a result, Alabama had $100 Million in new private equity dollars spread between six funds which range in size from $11 to $20 million each. Then, in 2008, an additional $100 Million in private equity dollars spread between six funds became available. The result was $200 Million of new venture capital available to qualified businesses.

Why then, in a state that contains some leading science and technology universities, aren’t new innovative technology companies springing up at the pace of other states?   It’s because the new companies can’t find seed capital investors the way they can in other states.  Without seed capital for high growth startups, there are very few later stage high growth startups that can make use of the CAPCO investments.  The recent economic meltdown in the banking industry has only intensified this investment gap, as investment firms that used to look at earlier stage companies can now look at more established deals because traditional bank financing is not readily available.  
 
Some 20 or so states have already seen the need to encourage investors to fill this investment gap.  Those are many states where the government offers an Angel Investor Tax Credit — a tax credit that is given to people who invest in small but emerging companies.

• Minnesota is trying to pass a Angel Tax Credit (Link)
• ACA study on Investor Tax Credits  (Link)

If Alabama legislators want to really do something to encourage good organic economic growth in our state, they should look at what other forward looking state's are doing and provide some encouragement for our local investors to put their invesment dollars to work at home.

Don't forget Uncle Sam

After reading Jeff McIntire-Strasburg's recent post titled: "Ecopreneurist: How to Approach a Venture Capital Firm with a Cleantech Business Idea" I was struck by the thought of a company I am working with at the moment in the Green Technology world.

One of our early conversations centered around their financial projections and pro-forma statements in which the company president proudly said "our figures don't include any tax based income or incentives, these are straight numbers." Of course, I wanted to see the non-tax based numbers in an overall evaluation of the business, but one of the things that really makes the green industry potentially above average regarding investment returns is the proliferation of numerous tax and government incentives and our management team was really missing the boat on potential tax strategies that could have a dramatic effect on both capital requirements and overall returns of the business.

Thankfully, we have now begun an analysis of the available tax strategies and we have already uncovered federal benefits that will significantly add to our bottom line.

So the moral of the story is...don't forget Uncle Sam.

Hillary Clinton, Democrat for President, on the Estate Tax

In the first in a series, California Business Law Blog examines the Republican and Democrat presidential candidates' stance on the estate tax, sometimes also know as the death tax or ibheritance tax. First up, Senator Hillary Clinton (Democrat - New York):

Her current presidential platform proposal, which is to some extent inconsistent with her prior voting record, as can be seen below, is to freeze the federal estate tax at 2009 levels, that is, a $3.5 million exemption (she describes this as a $7 million exemption, presumably meaning, for a married couple, the combined total of $7 million in exemptions, which requires proper estate planning to take advantage of). As a result of the "Bush tax cut", the estate tax has been trending downward each year and is currently slated to be completely elminated in 2010 (unlimited exemption amount, 0% tax rate, leading to numerous estate planning jokes centering around solving estate tax problems by planning to die in 2010). However, due to a legislative compromise and other technicalities, it is also scheduled to jump back to tge old, higher tax levels commencing 2011 (only $1 million exemption, 55% tax rate on the balance). It is unlikely give the current political climate that the currently-scheduled death tax rates for 2011 will be allowed to stand unchanged.

For reference purposes, as this is written, in 2007, the exemption amount is $2 million, and the estate tax rate is 45%.

Recently, on the campaign trail in Derry, New Hampshire, Clinton --

answered questions from voters at a town hall at the opera house here, which was her second stop on a two-day swing through the state.

The first question from the audience after Clinton's speech came from a woman who challenged her plan to pay for universal retirement accounts by freezing the estate tax at 2009 levels. The woman said the money from inheritance had already been taxed when it was earned and she felt taxing it again was the wrong way to fund Clinton's plan.

"People disagree about this, but the estate tax, which came into being by Republicans like Teddy Roosevelt and others, and has been part of our tax system for a very long time is there for a real simple reason: In America, we've never liked the idea of massive inherited wealth," Clinton replied. "Part of the reason why America has always remained a meritocracy where you have to work for what you get, where you have to get out there, make your case to people, come up with a good idea, is that we never had a class of people sitting on generation after generation after generation of huge inherited wealth."

Clinton said people like Bill Gates and Warren Buffet were against doing away with the estate tax, because they made it on their own. She went on to explain, to applause, that a married couple could have an estate worth up to $7 million before getting taxed, and said she considered that a "pretty healthy estate to leave to your children."

Source: MSNBC.com: Clinton Questioned on Estate Tax, October 10, 2007

Critics of Clinton's, Gates', and Buffet's argument - not present to state their arguments in New Hampshire - point out that these men are so wealthy that they do not represent the typical high net worth family that is often attempting to pass a family business or farm along to the next generation, and are millionaries, not billionaires. Gates and Buffet deal in publicly traded companies, and cannot pass along Microsoft or Berkshire Hathaway, each worth billions beyond the personal wealth of either businessman and each owned by thousands of investors, to their children.

---

As a Senator, she has had the opportunity to vote on the issue serveral times:

Voted NO on raising estate tax exemption to $5 million.

An amendment to raise the death tax exemption to $5 million; reducing the maximum death tax rate to 35%; and to promote economic growth by extending the lower tax rates on dividends and capital gains.

(Proponents recommend voting YES because:

It is disappointing to many family businesses and farm owners to set the death tax rate at what I believe is a confiscatory 45% and set the exemption at only $3.5 million, which most of us believe is too low. This leaves more than 22,000 families subject to the estate tax each year.

Opponents recommend voting NO because:

You can extend all the tax breaks that have been described in this amendment if you pay for them. The problem with the amendment is that over $70 billion is not paid for. It goes on the deficit, which will drive the budget right out of balance. We will be going right back into the deficit ditch. Let us resist this amendment. People could support it if it was paid for, but it is not. However well intended the amendment is, it spends $72.5 billion with no offset. This amendment blows the budget. This amendment takes us from a balance in 2012 right back into deficit. My colleagues can extend those tax cuts if they pay for them, if they offset them. This amendment does not pay for them; it does not offset them; it takes us back into deficit. It ought to be defeated.

Reference: Kyl Amendment; Bill S.Amdt.507 on S.Con.Res.21 ; vote number 2007-083 on Mar 21, 2007);

Voted NO on supporting permanence of estate tax cuts.

Increases the estate tax exclusion to $5,000,000, effective 2015, and repeals the sunset provision for the estate and generation-skipping taxes. Lowers the estate tax rate to equal the current long-term capital gains tax rate (i.e., 15% through 2010) for taxable estates up to $25 million. Repeals after 2009 the estate tax deduction paid to states.

(Proponents recommend voting YES because:

The permanent solution to the death tax challenge that we have today is a compromise. It is a compromise that prevents the death rate from escalating to 55% and the exclusion dropping to $1 million in 2011. It also includes a minimum wage increase, 40% over the next 3 years. Voting YES is a vote for that permanent death tax relief. Voting YES is for that extension of tax relief. Voting YES is for that 40% minimum wage increase. This gives us the opportunity to address an issue that will affect the typical American family, farmers, & small business owners.

Opponents recommend voting NO because:

Family businesses and family farms should not be broken up to pay taxes. With the booming economy of the 1990s, many more Americans joined the ranks of those who could face estate taxes. Raising the exemption level and lowering the rate in past legislation made sense. Under current law, in my State of Delaware, fewer than 50 families will face any estate tax in 2009. I oppose this legislation's complete repeal of the estate tax because it will cost us $750 billion. Given the world we live in today, with clear domestic needs unmet, full repeal is a luxury that we cannot afford.

To add insult to this injury, the first pay raise for minimum wage workers in 10 years is now hostage to this estate tax cut. We are told that to get those folks on minimum wage a raise, we have to go into debt, so that the sons and daughters of the 7,000 most fortunate families among us will be spared the estate tax. We must say no to this transparent gimmick.

Reference: Estate Tax and Extension of Tax Relief Act; Bill H.R. 5970 ; vote number 2006-229 on Aug 3, 2006);

Voted NO on permanently repealing the "death tax".

A cloture motion ends debate and forces a vote on the issue. In this case, voting YES implies support for permanently repealing the death tax. Voting against cloture would allow further amendments. A cloture motion requires a 3/5th majority to pass. This cloture motion failed, and there was therefore no vote on repealing the death tax.

(Proponents of the motion say:
We already pay enough taxes over our lifetimes We are taxed from that first cup of coffee in the morning to the time we flip off the lights at bedtime. If you are an enterprising entrepreneur who has worked hard to grow a family business or to keep and maintain that family farm, your spouse and children can expect to hear the knock of the tax man right after the Grim Reaper.
In the past, when Congress enacted a death tax, it was at an extraordinary time of war, and the purpose was to raise temporary funds. But after the war was over the death tax was repealed. But that changed in the last century. The death tax was imposed and has never been lifted.
The death tax tells people it is better to consume today than to invest for the future. That doesn't make sense.

Opponents of the motion say:

Small businesses and farms rarely--if ever--are forced to sell off assets or close up shop to pay the tax. Under the current exemption, roughly 99% of estates owe nothing in estate taxes. By 2011, with a $3.5 million exemption, only two of every 100,000 people who die that year would be subject to the estate tax.
Today's vote is on a motion to proceed to a bill to repeal the estate tax. Not to proceed to a compromise or any other deal--but to full repeal. I oppose full repeal of the estate tax. Our Nation can no longer afford this tax break for the very well off. Permanently repealing the estate tax would add about $1 trillion to our national debt from 2011 to 2021.

Reference: Death Tax Repeal Permanency Act; Bill HR 8 ; vote number 2006-164 on Jun 8, 2006).

Source: On the Issues: Hillary Clinton on Tax Reform

The conservative Club for Growth, which favor repeal of the estate tax, rated Clinton's voting record 8 out of 100 for 2006 for pro-growth economic policies.

See also:

John McCain, Republican for President, on the Estate Tax
Barack Obama, Democrat for President, on the Estate Tax
Hillary Clinton Offical Site: Economic Blueprint

June 2008 update: Hillary Clinton ended her 2008 bid for the White House on June 7, 2008, leaving Barack Obama as the presumptive Democrat nominee.

California Tax Burden Among Worst in Nation

According to an article published last year, California ranks among the worst of the states in terms of its tax burdens on businesses and individual residents. The article points to last year's election results in which California voters approved additional taxes, as adding to the state's already high tax burden:

California may be back on its way to becoming Taxifornia – and that's before voters give their verdicts on Propositions 86 (cigarette tax), 87 (oil tax), 88 (property tax) and 89 (corporation tax). California was rated as having the 45th-worst tax climate among the 50 states in 2007, down from 42nd in 2005, according to the Tax Foundation's State Business Tax Climate Index, released this week.

The index measures five tax rates: corporate, individual income, sales, unemployment and property. The best states are, in order, Wyoming, South Dakota, Alaska, Nevada and Florida. After California, the worst states are Vermont, New York, New Jersey, Ohio and, worst of the worst: Rhode Island.

Curtis S. Dubay, an economist at the foundation and co-author of the report, told us that California's drop in the listings was not major, down just three spots, and was due to slight improvements in other states more than any worsening in California, where tax rates pretty much held steady the past year, except for the passing of some local school bonds. "It's possible to drop in the rankings just by standing still," he said. "The states tightly clump up at the bottom of the rankings. So any small change could make a difference."

The bottom line is that California's ranking was low, and remains low. Most jolting for Californians should be the comparison with neighboring states. In the overall tax index, Nevada ranks fourth, Oregon, 10th; Washington state, 11th; Utah, 16th; and Arizona, 28th.

The study offers an example from 2005 of how businesses make decisions based on tax rates: When Intel decided "to build a multibillion-dollar chip-making facility in Arizona due to its favorable income tax system. California struggles to retain businesses within its borders because Nevada provides a low-tax alternative." The study concludes that "taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of tax-friendly tax climates."

Taxifornia, Here We Come, Orange County Register (California), October 26, 2006

Likewise, California-based Countrywide Financial's CEO told shareholders employees that don't need to be in California will increasingly be hired in or relocated to Arizona instead, as a result of the tax and regulatory environment in California, which he characterized as out of control.

For most California small businesses, however, it makes little sense to form a corporation or LLC out of state (e.g., in Nevada or Delaware), which in most instances ends up costing more in initial and ongoing legal and accounting expenses, and saving nothing in taxes. If the business' owners are willing to relocate, then indeed California is, as the article points out, due to its political climate, among the least attractive for businesses, and Nevada is certainly preferable. But for those Californians not willing to move out of state and take their business with them (as many have in recent years), California remains the logical choice for incorporating a California business in most instances.

Los Angeles Business License Tax Errors

Some new or small businesses in the City of Los Angeles who filed their business tax renewal on time, and qualified for exemptions from tax, are receiving Notices from the Office of Finance indicating they owe tax, interest, and penalties. If you believe you have received such a notice in error, contact your business lawyer, accountant, or the City of Los Angeles Office of Finance directly for resolution:

http://www.lacity.org/finance/

2007: Time to Incorporate Your Sole Proprietorship?

IRS to Target Schedule C Filers:

In a recent telephone conference, IRS commissioner Mark Everson said that they will be conducting more audits on individuals running unincorporated businesses (i.e. self-employed individuals).

While Schedule C filers have long been audit targets for the IRS, they are now stepping up their audit efforts because they believe that self-employed individuals represent a large portion of those individual taxpayers underreporting their income.

IRS to Target Schedule C Filers, About.com U.S. Business Law / Taxes, 25 December 2006

Incorporating, while not a panacea by any means, nor appropriate for all small businesses, entrepreneurs, and those with side businesses in addition to W-2 income, can help reduce exposure to a time-consuming audit, as well as potentially offering tax, asset protection, and other benefits to business owners.

See also: January 2009 update