100% Capital Gains Exemption - Progress!

By: Marianne Hudson, ACA Executive Director

We have good news. Several ACA members have asked about the "1202" exemption that expired December 31, 2013. The Senate Finance Committee approved the 100% exemption of gains in investments in qualified small businesses earlier this month as part of its "tax extenders" bill. We have even better news - the extension is for two years and would be retroactive to January 1, 2014.

We’re looking out for you. The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act still needs to be approved by the Senate and House, but it appears to have bi-partisan support. More details on the bill are in the Senate Finance Committee website.

For those of you who are not awar of this tax exemption, its formal name is Qualified Small Business Stock, and full IRS information is here.  If you don't know about it, at least make sure that your accountant does!  It can be a great tool to catalyze investment in job-creating startups and help our economy.

Congress first passed the 100% exemption in Fall 2010, and it had an immediate impact on investment by ACA members and their portfolio companies.  For instance, Cabulous (now named Flywheel) had raised money from Sand Hill Angels, the Bankd of Angels, and other investors inthe spring of 2010 and considered itself fully funded.  The company was planning to on recycling profits into growth in head-count over time.  "However," said Ian Sobieski, managing director of Bankd of Angels, "because of the new tax bill, Cabulous decided to do a small raise of funds specifically to accelerate the hiring of more employees.  In this way, the tax law is a win-win-win"  investors may receive tax free gains, Cabulous gets to expand quicker, and new jobs are created in the US economy."

The problem with this exemption is that is has been one of many tax policies that has had fits and starts as Congress has let it expire a few times during policy negotiations, and it hasn't had the stability for investors and entrepreneurs alike to count on it for the future, likely reducing its investment impact.  If a bi-partisan Congess does pass the EXPIRE Act or a House version of tax extenders and "1202" has the chance to be in place for two years, it may lead to more consistent investment and economic impacts that are several times larger than the taxes on those gains would have been.

ACA will continue talking with Congressional leaders about this tax policy and keep our members updated on our progress.  Some day we would also like to incorporate improvements to this program - such as reducing the holding period for stock from five to two years - but for now job #1 is to make sure the exemption is reinstated.


To all ACA Members: Please contact your Congressional reps in Senate and House, and ask them to support the 100% capital gains tax exemption in the upcoming "tax extenders" bill (The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act -- as Marianne noted above. Do it today! Thanks!
- Jean Peters (Golden Seeds LLC)  9 years ago