Balanced Federal Tax Policy

ACA has three main priorities in tax policy in order to ensure a healthy environment for angel investment in innovative startup companies:

Federal Tax Credit for Angel Investors
ACA supports the American Opportunity Act sponsored by Sen. Mark Pryor and Sen. Scott Brown. It comes relatively close to the benchmark criteria ACA's public policy committee set for angel tax benefit legislation.

We are committed to working with Congress and the Administration to get the credit passed via this bill or as part of other appropriate legislation.

Qualified Small Business Stock (also known as Section 1202)
Congress passed the American Taxpayer Relief Act on January 1, 2013, dealing with many tax issues that were part of the "fiscal cliff" discussions of 2013. Among the items included in the bill was the extension of the 100% exclusion of gains on Qualified Small Business Stock(QSBS). This is important for angel investors and the startup companies they support. See the 2013 Tax Issues page for more information for a summary of the bill's components for angels.

We would like to see 1202 become permanent, and also believe that several updates are needed so that QSBS stimulates even more angel investment in innovative early-stage companies. The recent acts making the 100% gain exclusion a reality have generated interest and made an impact in the angel investment community. The changes we recommend, in priority order are:

  • Extend Section 1045 roll-over period. With regard to Section 1045, increase the roll-over period from 60 days to a year in order to encourage more investment. The issue arises because QSBS exits are unpredictable and 60 days is simply not enough time to re-invest in new deals. Startup deals are not like real estate-they require locating the deal, conducting due diligence and negotiating terms-and oftentimes, deals don't close.
  • Shorten the hold period on 1202. Current regulation requires holding the stock 5 years before exit to qualify for the exclusion. Given the trend toward earlier exits these days (e.g. gaming, consumer internet), a two-year holding period would be more appropriate to create incentives for investment.
  • Allow Limited Liability Corporations to qualify. Many startups are organized this way to minimize their initial costs.
  • Clarify that stock acquired on convertible notes and warrants and options qualifies. Right now this is not 100% clear.
  • Fix working capital and redemption limitations. Specific definitions within QSBS could be improved, such as removing the working capital requirement, clarifying that all startups qualify without regard to how long their R&D process is, and broadening the redemption triggers. These are traps that can inadvertently eliminate the exemption.
  • Allow "tacking" of QSBS status for transfers, even if for value. Right now, if the stock is transferred for value, it loses the exemption. Allowing QSBS treatment to tack would improve early stage investor returns (albeit taxed) because the stock will have more value to a secondary buyer.
  • Get the states in line. Where possible, "encourage" the states to honor the same exemption. In California, the 1202 and 1045 equivalents are ineffective because they require 80% of assets and employees reside in California during the holding period, which is a rare occurrence.


In support of legislation that supports some of these goals, ACA endorses these three bills: