

Obama proposes no capital gains tax on qualified small business stock - yokumtaku
http://www.startupcompanylawyer.com/2009/05/13/obama-proposes-no-capital-gains-tax-on-qualified-small-business-stock/

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cperciva
In Canada, capital gains are 50% taxable and the first $750k of capital gains
on small business stock (subject to fairly reasonable definitions) is exempt.

I'm curious to know how this compares to other countries; could HNers from
elsewhere please reply to this with the details from where they are?

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gambling8nt
en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

and, more generally en.wikipedia.org/wiki/Capital_gains_tax

Briefly, in the US cap gains are taxed at a special rate separate from regular
income; if you hold the associated asset for at least 6 months, this rate only
applies to half the capital gains, and if you fall into a low enough income
bracket, your rate is significantly reduced.

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ericb
This is cool, but we incorporated in January. If this passes, do we redo it
now?

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sethg
If I read the article correctly, you can issue new stock and sell it to
investors, and those investors would get the benefit of the new law.

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Darmani
How are they defining small business? There are quite a few definitions that
exclude startups.

Still, since I've spent the last few months hearing rumors about a bill
allowing the president to seize any business that "threatens the economy,"
this is welcome news indeed.

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adamsmith
"..the corporation must be engaged in a trade or business other than: one
involving the performance of services in the fields of health, law,
engineering, architecture, accounting, actuarial science, performing arts,
consulting, athletics, financial services, brokerage services or any other
trade or business where the principal asset of the trade or business is the
reputation or skill of one or more employees; a banking, insurance, financing,
leasing, investing or similar business, ..."

Looks like we're out, guys..

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dpifke
I don't see that as exclusionary; I read it as intending to exclude
professional corporations, i.e. where you bill for _time_ (performance of
services) as opposed to charging for a _product_.

I imagine if they didn't exclude such, you'd have a rash of LLPs turning into
C-Corps; not sure what other negative consequences they're hoping to prevent.

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graphene
they should state that more clearly then, if that is their intention.. like
this it seems to me as if an engineer who designs some important technological
invention and starts a startup around it, would be excluded... Also, would it
be that bad if a significant amount of companies changed their formal
structure in order to take advantage of this? It would mean an across-the-
board incentive to create (and grow) companies, does it really matter that
much what sector they're in?

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byrneseyeview
Yes, it matters. Most smaller companies tend to be service companies, because
they don't have huge economies of scale. Most product companies tend to be
larger -- it's easy to moonlight as a designer who figures out what box you
should sell a lightbulb in, but you can't moonlight as the guy building the
lightbulbs, because you need tens of millions of dollars to manufacture them
profitably.

A subsidy to small businesses that didn't exclude service businesses would
have the effect of making more people want to work for service companies.
Which is fine, except that they produce negligible exports. If you're selling
lightbulbs, you make money in India by selling them there; if you're a lawyer,
the way you make money in India is by hiring an Indian lawyer in India, and
somehow convincing this lawyer to give you a fraction of his billings (so most
of the money stays behind).

Given the potential trade deficit problems, I suspect Obama wants to focus on
subsidizing businesses that can export.

~~~
sethg
Good point.

Also, the income of a service company is mostly going into the pockets of the
service providers, and if those service providers are well-paid then they're
more likely to save their marginal dollar instead of spending it. So from a
Keynesian point of view, this is not the kind of business you want to throw
money at during a recession.

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rdl
This looks pretty good -- I'm not sure what kind of event I'd want in 5 years
to exit from a bootstrapped company, but having more options is always great.

The cynic in me thinks that Obama recognizes startups and small businesses
will be the only bright points in the economy, so he wants to do something to
make it appear he helped them, or possibly even was the primary reason for
their success, by the time 2012 rolls around. However, wanting to be on the
winning team isn't a bad thing in public policy.

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mchristoff
so let me get this right...

currently you pay capital gains (28%) on 50% of the worth of sold stock. this
proposal would eliminate that if the stock is held for 5 years?

correct?

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drusenko
no, people pay capital gains (15%) on 100% worth of sold stock.

if you qualify for small business stock + 5 years discount currently, you
could pay capital gains (15%) on 50% of the stock, and AMT (28%) on the
remaining 50%, giving an average tax rate of 21.5%, worse than existing
capital gains, which clearly doesn't make sense, so no one does it.

under the new proposed system, if qualified, there would be NO capital gains
on 100% of the stock, AND it would not be subject to AMT, meaning that the
gain is completely tax free (minus state tax, of course).

the only restriction would be that you have to acquire stock in the company
when it is worth less than $40M (easy) and hold it for 5 years (harder).

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anamax
> the only restriction would be that you have to acquire stock in the company
> when it is worth less than $40M (easy)

Not really.

Most of us aren't accredited investors, so we can't buy stock in small
companies without starting them, working for them, or being related to the
founders.

Reduced taxation on small biz stock will make successful small biz more
profitable, so it's a big deal for angels, VCs, and their limited partners,
but because it doesn't increase the size of the investor pool, it just helps
their returns.

This may have a modest effect on the number of funded small biz, but it won't
help most of us.

You'd think that the super-genius' in the Obama administration would know
about the accredited investor stuff.

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Radix
_Most of us aren't accredited investors, so we can't buy stock in small
companies without starting them, working for them, or being related to the
founders._

What is the reasoning behind preventing people from investing into companies?
Is it just to keep people from being swindled? It seems off to me.

~~~
anamax
> Is it just to keep people from being swindled?

That's the stated reason. Your guess is as good as mine as to whether it's a
real reason or even the only reason.

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Tichy
Won't this just lead to businesses changing their organizational structure,
then carrying on as before? For example, instead of creating departments in a
big company, one could split it into several smaller companies. (I don't
really know the tax law in question, but it sounds like a potential loophole).

~~~
graphene
I wouldn't think so, because this applies only to capital gains tax, i.e. only
becomes relevant when the company is sold. I don't think there would be any
advantage in transforming departments into separate companies, and then
cayying on as before..

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bigbang
So if you own a small biz(with or without partners), the gains you realise
from it are tax exempted, if you put the gains back into the company and take
it after 5 years. Is that right?

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nazgulnarsil
too little too late mister president. I agree with winterspeak in that what we
need is severely reduced payroll taxes to stimulate aggregate demand.

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ibsulon
This makes no sense to me, even when I've seen it before.

I'm the classic saver. I'm the individual who they want to spend more right
now.

I'm saving because it's not a certainty that my contract will be renewed right
now. I could very well end up living off the savings I'm accumulating right
now.

If you reduce my payroll tax, I won't spend more. I'll save more. ___

If someone is unemployed, reducing the payroll tax is not going to change
anything.

If someone is insecurely employed, they aren't going to change their spending
habits, they will change their savings habits. There is no gain. That's most
everyone right now!

Further, why is it going to help for me to buy more Saudi, Mexican, and
Venezuelan gas, or buy more Chinese goods? It seems to me that providing a
sales tax break for goods and services originated in the United States would
provide a much better economic lift. (I don't know if this would be legal,
however.)

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noss
A sales tax break for goods originating from US is, in all ways, a trade
barrier. You can expect global mutual treatment. That means decreased foreign
demand for US products.

So you end up sponsoring US companies that were not capable to compete with
more efficient foreign companies. Which is in itself a more interesting
problem. Most European countries have as high, or higher, standard in working
conditions (and TAXES!) and they do have positive trade balance.

Does it really seem like a wise decision to make US produced products less
attractive on the global market, for the hope that tax cuts on domestic
products will match up, and then some, with increased income tax from the new
jobs?

An alternative is to instead use taxes to set up better public transport, so
the time-and-cost-to-get-to-work radius around companies increase. Making it
both easier to find the right competence (larger area, more people to chose
from) and making more real estate close (time-wise) to the city, making the
cost of living lower.

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ibsulon
I agree with all these points, but the point I had been trying to make is that
increasing spending in the face of a trade deficit means that we are doing
more to spur China's economy than our own.

I'm not sure that the public transport makes a difference with our car culture
and low population densities. I can't really think of a good way to do a
subway in LA, for example, though they tried.

