Big News on Accredited Investor Definition and Tax Breaks – All in the Same Day!


By: Marianne Hudson, ACA Executive Director

December 18 was a very big day for angel investors.  Not only did the SEC put out a staff report that recommends tweaks to the accredited investor definition, but Congress passed a big tax act that makes permanent the 100% exemption of capital gains.  Here’s what you need to know in connected blog posts:

Tax Benefits - The holiday party starts early with a gift from Congress

The House and Senate passed the PATH Act (Protecting Americans from Tax Hikes) which included the Angel Capital Association’s top tax priority, extension of Section 1202 of the US Tax Code which allows a 100% exclusion of gains on Qualified Small Business Stock has been made permanent. ACA will continue to support reform of this tax exemption, such as reducing the current minimum five year holding period, in future tax reform. ACA commends our champions who have promoted a tax code that rewards innovation and job creation: Senator Ron Wyden (D-OR), Senator Maria Cantwell (D-WA), Congresswoman Lynn Jenkins (R-KS) and Congressman Ron Kind (D-WI).  Thanks also to our government affairs leaders, Chris McCannell and Joel Riethmiller.

Qualified Small Business Stock was developed in 1993 to spur investment in startup businesses, rewarding the combination of investor risk and job creation involved. In general, investments must be made by individuals or partnerships in C Corporations with less than $50 million in assets. The stock must be purchased directly from the corporation, and held for at least five years. Many businesses are eligible, except for businesses in the service, finance, mining, extraction, restaurant, and hospitality industries, in addition to certain types of real estate businesses. The amount of gain that can be excluded is limited to the greater of 10 times the investment or $10 million – so this can be a huge windfall.  All of the details on how to take advantage of this tax benefit are here and here.

It may be that this 100% benefit is actually temporary.  The Hill, which covers all things political in Washington, DC has an article today noting that the “tax extenders” that Section 1202 are part of, are really “temporarily permanent” as a way to move Congress toward meaningful tax reform. This paragraph from the article explains it well:

The tax extender package is setting the stage for comprehensive tax reform in one archaic way. "Revenue scoring" and "budget baselines" may be inside-the-Beltway concepts, but they can make or break tax reform. By law, Congress is required to score the revenue loss or gain to the U.S. Treasury of specific provisions in play in tax reform. If all 52 expiring provisions were allowed to expire, the congressional budget baseline would be $600 billion more in revenue. Tax reform would have to find that amount of money to "pay for" tax provisions that good tax policy requires and for popular provisions needed politically to get tax reform done. "Temporary permanence," a term coined by Scott Hodges of the Tax Foundation, captures what happened this year. The tax extenders this year were made permanent temporarily to make it easier to get tax reform.

As always, ACA will continue to advocate for angels on this issue and keep you informed on what’s going on.

Accredited Investor Definition – A mix of gifts and lumps of coal in our stockings

(click here for this post)

Subscribe

Model Deal Terms Expectations Summary Memo by Ham and Christopher LM  on  November 27
Pitch-Perfect Pitch Deck by Sheldon Hamburger  on  November 02