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New Federal Law: Zero Taxes on Gains on Small Business Investments (angelsoft.net)
51 points by andrewljohnson on Dec 5, 2010 | hide | past | web | favorite | 22 comments

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

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

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.

For a new company being incorporated, how does this compare to an 83(b) election in terms of tax-relief benefits?

Unrelated. 83b is only if your stock is restricted/at risk of repurchase/vesting. If it is, 83b it obviously, but that is always the case. 83b just means tax me at time of initial grant vs. on every vest at then current market value. It is not tax relief.

Yes, everything I have seen makes it apply to founder shares. (or even semi founder employees who buy stock vs options). Of course ianal.

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.

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.

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?

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-...

The section of the rule SBJA applicable to most HN people is capital gains exclusion (and AMT pref exclusion) for QSBS, specifically for founder shares.

For going concerns with profits, sure, the other stuff matters (although I think the more liberalized depreciation, and allowing cellphones to be more easily expensed, is the relevant part). Anyone with enough revenue and profits to care probably has an accountant who is going to handle all of this for him, so it isn't as individual decision centric as the capital gains issues.

Why so short? Politics. Note that there was an election during the September 27 to 31 December period. They started working on this back in mid summer.

The idea is to create a burst of activity this year. It would then be fully attributable to the current congress.

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.

>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.

this was signed in late september

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"

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

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

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. ...


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.

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.



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.

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