

 New Federal Law: Zero Taxes on Gains on Small Business Investments - andrewljohnson
http://angelsoft.net/blog/2010/10/08/new-federal-law-zero-taxes-on-gains-on-small-business-investments/

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dminor
Does this apply to founders as well? If I've got a side project, is it
worthwhile to start a C corp right now?

~~~
gojomo
And especially: does a founder's contribution of initial IP, rather than cash,
for founding shares also qualify for the tax-free treatment?

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rdl
Much safer to buy your shares for cash, on top of the ip. In a new c Corp, buy
for par or slightly higher. 1mm shares at $0.0001/share. Skip lunch that day.
Make sure it is all well documented.

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rdl
This has been discussed several times on hn and quora, and I have tried to get
friends to take advantage of it. Of course, I am not a lawyer, nor is this
legal advice.

1) this is a super loophole for founders. In a new entity, which costs $250
and 1h to set up yourself online, invest $100 to buy your founders shares.
Hold for 5 years, sell for $10mm, save $3mm in taxes.

For an entity with multiple founders, I would spend more and get real legal
paperwork done, but for a one man corp at an early stage, just be competent.

2) vc investments are not going to benefit, but angel and friends and family
can. Biggest issue is no easy way to do convertible debt, but if you want a
priced round, go for it. I wish I had spare cash to invest!

3) I see no reason you can't form multiple entities in parallel, as long as
they meet active trading requirements. I incorporated several side projects,
which probably won't generate more than trivial revenue over the next 5 years
as I work on a real startup, but which start the five year holding clock. In
five years, or ten, I can take them and try to make real businesses. As five
years will have passed, could easily sell whenever. One might also use this
for a studio model business, where e.g. each iPad app is a separate corp and
may sell independently.

IMO they really didn't think through the consequences of "greater of 10x the
basis or $10mm" in the context of founder shares purchased for a trivial
amount.

Personally, if you meet the above requirements for an investment, you owe it
to yourself to pull any 2011 or 2012 in corps forward to q4 2010. If you feel
guilty for avoiding taxes, donate to the program of your choice.

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nkassis
Why is it for such a short period? It seems like this kind of thing should be
for a full year after the law is passed or something similar.

~~~
anigbrowl
This period is for people who may be able to reduce their 2010 tax liability.
If you don't realize your gains before the end of the year, you'll be filing
them on your tax return for 2011. If you made your gains prior to September
(when the law was passed IIRC) then you did so with the expectation that 50%
of them were going to be taxable.

You really should read the text of the actual bill, which starts addressing
tax matters on page 51. Alternatively, have your accountant or tax lawyer
explain it for you. It modifies the existing rules, which are already complex
and require knowledge (or diligent research) of the tax code.

~~~
d2viant
The text of the bill says you need to initiate the investment prior to
December 31st, not realize the gains from it -- and from that point, they must
be held for five years. Am I reading that wrong?

~~~
anigbrowl
_It modifies the existing rules, which are already complex and require
knowledge (or diligent research) of the tax code._

Edit: OK, I suppose it's not that obvious. but if you keep reading, you'd see
the next part of the law adds a 5 year carryback for certain small business
investments, which is basically a retroactive tax credit allowing some small
business investors/owners to get a refund of some taxes paid over the last 5
years. Like, say, capital gains from investment in a small business.

That's not a full explanation (or even a meaningful one), just an example of
how different provisions can interact to give results that are no obvious when
they're taken in isolation. You should read the _whole_ tax section, there's a
lot of interesting stuff in it. Reading bits of laws in isolation from their
context often gives a misleading or incomplete picture.

Here's some accessible and more detailed information provided by an accounting
firm that provides a better overview of ways this law might benefit startups
and self-employed hackers:
[http://www.mohlernixon.com/informed/2010/09/focusing-on-
the-...](http://www.mohlernixon.com/informed/2010/09/focusing-on-the-small-
business-jobs-act/)

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gte910h
>Investments must be made between September 27 and December 31, 2010 to
qualify for no taxes on the gains.

Not much time left at all for that.

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danielayele
this was signed in late september

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gte910h
Wasn't saying it wasn't a good idea.

I'm saying "If you're going to do this thing posted on HN today, hurry up"

~~~
rdl
It takes an hour to form a corp online in Delaware.

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jcromartie
And now watch as big companies find a way to funnel their own money back into
themselves as "small business investments."

~~~
gregholmberg
The stock must qualify as small business stock. What are the restrictions?

(quoting just a bit of the very detailed GROCO article)

For QSBS purchased between September 27, 2010 and December 31, 2010, a zero
percent effective income tax rate will apply to at least the first $10 million
of gain upon its ultimate sale if applicable requirements are met. Excluded
gain from these investments will not be treated as a preference item for AMT
purposes, so the benefits extend equally to AMT taxpayers. ...

<http://www.groco.com/readingroom/invest_qsbs.aspx>

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rdl
I think a $250 corporate formation is an excellent gift for hackers this
holiday season!

If grellas or a competent tax attorney would weigh on in this, it would be
most appreciated; I'll donate $100 to the charity of your choice for a
published writeup of SBJA2010 QSBS and how it applies to founder shares, sort
of a howto, before 15 DEC 2010.

~~~
gregholmberg
Pittsburgh, PA based Carbis Walker LLP (CPA firm) offers advice on SBJA2010
that includes this paragraph ...

Start-up expenditures.

A certain amount of qualified business start-up expenses may be deductible in
the tax year in which the active trade or business begins. The new law
increases the amount of start-up expenditures that a taxpayer may elect to
deduct from $5,000 to $10,000 for tax years beginning in 2010. The new law
also increases the deduction phase-out threshold so that the $10,000 is
reduced, but not below zero, by the amount by which the cumulative cost of
qualified start-up expenses exceeds $60,000.

<http://www.carbis.com/tax/sbja2010.php>

hth

~~~
rdl
Yeah, that's a good point too. The core issue is the applicability of
SBJA/QSBS to new startups and founder shares, I think -- that's potentially a
savings on $10mm of capital gains and AMT preference, which could easily be
$3mm by 2016.

The other trick this year is that you can convert 401k and IRA to Roth and
split the income over 2011 and 2012 (2 years), or from 2010 forward, effective
removal of income limits for Roth. Roth IRAs are awesome if you have really
low income a few years (but some savings), and then future much higher income.

