Seems like this bill was custom crafted for some specific person that has already made his move. It seems very unlikely that many investors hearing about this bill today will be able to change their strategy in such a short time period, it would only affect deals where they have the agreement made and paperwork and financing all ready to go with just the final signatures remaining.
Therefore it is not a bill to encourage investment. It is a bill to help out some specific person.
The stock must be acquired between 27 SEP 2010 and 1 JAN 2011.
You then hold it for at least 5 years, and subject to the other provisions, it's exempt from federal tax (especially AMT!) when exercised.
So, this is a bet on LT capital gains rates circa 2016+. But, a bet that doesn't particularly cost anything, assuming you were going to start the business in the next 3 months anyway.
My reading is that one needs only to purchase the stock before Jan 1, 2011 and then hold it for at least five years. Gains from sale of the stock after that would then be taxed according to this new bill.
"which includes a temporary exclusion for 100% of the gain recognized by non-corporate investors from the sale of qualified small business stock (“QSBS”) acquired after September 27, 2010 and before January 1, 2011"
so the dates apply to "acquired" rather than "recognized." It's pretty ambiguously worded.
note that this does not apply to any of the following types of businesses:
• Businesses that performed services in health, law, engineering, architecture, accounting, performing arts, consulting, athletics, financial services or brokerage.
• Businesses that have as their principal asset the reputation or skill of one or more employees.
• Any banking, insurance, financing, leasing, investing or similar business.
• Farming, mining or petroleum production.
• Hotels, motels, restaurants and similar businesses.
In other words, no consultancies or LLPs. Which makes sense, because otherwise existing firms might take advantage of this policy as a loophole escaping taxes.
HN community is ultra-cautious about upvoting humorous comments. This is likely because these types of comments quickly devolve into and encourage low-quality discussions. The exception is when the comment is extremely witty and contextual.
Actually, it would be interesting if someone did an analysis of the top 100 humorous comments on HN - it would be very fascinating.
Edit: I kinda had a fear that I would be downvoted for explaining.. oh well
I especially don't upvote humor that is nothing more than social signal flashing. If your "humor" boils down to "Hurr hurr, them folks sure are teh dumb where we are teh smartz!", expect a downvote. That's toxic stuff, regardless of the target.
In this case, it's political. The conservative end of the spectrum is borderline rabid right now, so comments implying things like "Fox News is comically untruthful" will be taken in an "us vs them" frame of mind. Regardless of Fox News's truthfulness.
I heard about this a while back. One thing that I haven't heard any talk about is how this affects early employees who may have had options in their company.
It sounds like this could benefit people exercising options. At least, I don't recall reading anything that would preclude these benefits from being applied to option purchases.
So why does this only run for a few months - until the end of the year?
If you want to encourage investment in startups doesn't this have to be permanent - not just a hand out for deals that are already in progress.
(assuming it's not just a technical point that it needs a special bill for the current year and then becomes permanent as part of some other legislation)
You timebox something to encourage immediate action. Making it permanent or even long term may encourage investors to wait for the market to improve before acting, which isn't ideal for a bill aimed at improving the market.
These deals take months to put together though - this is only sweetening deals that would go ahead anyway, or giving a quick tax loophole to anybody that can put together a fake deal quickly.
It's like trying to boost car workers jobs by saying any new car bought today only is tax free - that doesn't exactly motivate makers to open new plants.
I don't have data to back this up, but I imagine sales increase more when a product is "on sale at a low low price" rather than the market price actually falling to that low low price.
Does this have to be an ordinary corporation, or does an LLC taxed as a C corporation count as a corporation here? It's a lot less hassle and paperwork to have an LLC.
Looks like my state has reduced requirements for single-shreholder corporations so I could start out with one of those this year and deal with complications when I add partners. It's just a choice of one day of formalities and pain today for a chance that I will want to sell it in five years.
This will help founders as much as it helps angel investors. Assuming you're building a business which is likely to exit at $50mm or less (i.e. most consumer internet companies), the biggest hardship is holding on for 5 years, which could be a couple years after M&A exit.
This also encourages founders to bring early employees into equity ownership by purchasing founders stock, vs. options, so those employees can get this favorable treatment. (generally, buying your stock with a right of repurchase ends up being a win because it converts ST to LT capital gains, anyway).
i.e. on day 0, the company is worth $10k, because the founder puts in $8k of his own money, and the first 4 employees buy their grants for $500 each.
The Bush tax cuts expire at the end of 2010. This is just temporary until the new adiministration can pass their tax legislation which will probably include something similar to this.
> One hypothesis might be that a more long-lasting bill is being drafted, and this an interim solution.
A more realistic hypothesis is that they've figured out that a long term approach is dumb. A bill that has to be renewed every six months gives folks two reasons a year to "help" the legislators.
Remember, "reform" means "we need to get more money from supporters".
That's 2009 thinking. You know how much work it is to round up 1,000 $2,300 donations?
Just get one guy to write a $2 million dollar check to the Chamber of Commerce and you're good to go. After all, it's freedom of speech, according to the Citizens United ruling.
Pass-through entity investors such as S Corporations, partnerships, and LLCs have special provisions to share the advantages with their owners. Read the law for details; the accounting could get complicated.
angels usually invest as individuals or via LLCs and super-angels and VCs are usually structured as partnerships so the exclusion won't apply to most active early stage investors.
A very obscure, complicated and short term bill that lets democrat congressmen go back to their districts and run political advertisements that claim they "passed legislation to help america's small businesses", etc.
Minimal effect, and on top of it, it is overwhelmed by bills already signed that do significant damage to the economy. For instance, the bill that massively increases the size of government, putting a permanent burden in taxation or inflation on the economy that Obama claims will "Stimulate" it. Making things more expensive and preventing businesses from expanding is not stimulative. Adding more workers to the government payroll is a drain.
> "For instance, the bill that massively increases the size of government, putting a permanent burden in taxation or inflation on the economy that Obama claims will "Stimulate" it."
Which bill is it that massively increases the size of government?
What's "huge"?
Similarly, what's the benefit of considering "expansion" of government bureaucracy without the context of its budget impact?
i.e. Is it meaningful to loathe an increase in the size of government if the effort will reduce the net cost of government?
e.g. Suppose we could hire a thousand accounts at a hundred thousand dollars a year to go over the defense budget with a fine-toothed comb. If the effect of adding these accountants was a cost reduction of several billion dollars per year, have we expanded government?
Looking at one side of the equation it's trivial to see that we have. But looking at the whole equation, in context, it's just as trivial to see that we haven't; not in any practical, useful sense.
So pardon me if I'm deeply skeptical of people arguing about only one side of the equation and with subjective measurements to boot.
"i.e. Is it meaningful to loathe an increase in the size of government if the effort will reduce the net cost of government?"
When has increasing the size of the government EVER reduced the net cost?
"Suppose we could hire a thousand accounts at a hundred thousand dollars a year to go over the defense budget with a fine-toothed comb. If the effect of adding these accountants was a cost reduction of several billion dollars per year, have we expanded government?"
The question is: If they hire these accountants and they don't reduce the overall cost by several billion dollars, can we fire them? Also, who decides how long we are going to wait and see if they will be successful..and how long would be considered successful? 1 year? 5? 10?
My other problem is that the Democrats will never admit when something just doesn't work. If a tax hike fails to improve the economy, we either didn't increase taxes enough (or fast enough) or the economy is so bad because of Bush that anybody in their position would have a problem. The faithful Democrat voter believes this crap and we get to keep repeating things that have already been shown to fail.
> "When has increasing the size of the government EVER reduced the net cost?"
Isn't that exactly what the CBO has estimated as the result of health care reform? A reduction in the deficit despite the increase in scope (and thus surely number of desks) of government?
> "The question is: If they hire these accountants and they don't reduce the overall cost by several billion dollars, can we fire them?"
I was making a point about the whole equation. If you absorbed my point you would already know that my answer is an unqualified "absolutely".
> "If a tax hike fails to improve the economy"
No-one has proposed that tax hikes will improve the economy. Tax hikes are proposed to reduce the deficit. Which, by definition, would depress the economy.
I have to tell you, it's pretty difficult to talk to people who are so certain they know what the other party is thinking and how they will react.
"Isn't that exactly what the CBO has estimated as the result of health care reform? A reduction in the deficit despite the increase in scope (and thus surely number of desks) of government?"
I don't know if I believe it. I would have to see the numbers. For years, people have claimed how great France has been with it's many social programs. Now, after creating a society that is dependent on these programs, they can't even cut it a little bit (because they are running out of money) without violent riots in the streets.
Also, Even though the deficit is reduced, overall quality has also been reduced. I have many relatives in Canada and they all come over here for any major surgery because of the waiting lists.
Greece is very similar. I've heard from many Democrats that the reason it's doing so poorly is because they didn't get enough in taxes (not the ridiculous social programs that just don't work in the long-run). This is exactly what I am talking about.
"If you absorbed my point you would already know that my answer is an unqualified "absolutely"."
You say this now..and it does sound great. But reality shows that it never happens this way. Governments are generally very inefficient and bloated. They also have no incentive to save money since it all comes from the taxpayers. Running a successful government and a successful business aren't really that different.
If you get funding from the government and you spend less, guess what happens? You get less money the next year...so most will spend it all, even though they don't need to.
"I have to tell you, it's pretty difficult to talk to people who are so certain they know what the other party is thinking and how they will react."
The best way to predict someone's future actions is to look at what they've done in the past. This is because for the most part, people don't change. This logic also applies to future spouses, friends, and bosses. I would really like the Democratic party to prove me wrong.
It's not difficult to talk to me. You just don't have a very good convincing argument.
Seems like this bill was custom crafted for some specific person that has already made his move. It seems very unlikely that many investors hearing about this bill today will be able to change their strategy in such a short time period, it would only affect deals where they have the agreement made and paperwork and financing all ready to go with just the final signatures remaining.
Therefore it is not a bill to encourage investment. It is a bill to help out some specific person.