5 ms·

Obama proposes no capital gains tax on qualified small business stock

63 points by yokumtaku 17y ago

cperciva 17y ago
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?
- gambling8nt 17y ago
  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.
- dreamz 17y ago
  there are many countries with no CGT (Capital Gain Tax).. http://en.wikipedia.org/wiki/Capital_gains_tax http://en.wikipedia.org/wiki/Capital_gains_tax http://www.globalpropertyguide.com/Asia/Hong-Kong/capital-gains-tax http://www.globalpropertyguide.com/Asia/Hong-Kong/capital-ga... it would be really interesting (for the people migrating to other countries for better opportunities) if someone compares cost of living in different countries based on their CGT ... may be this would really change the whole scenario ... for example if a family wants to decide between new-zealand and canada and lets say that their total saving (as per history) is around 10 to 20% which they regularly invest in real-estate/stock then CGT can change their decision or help them to make decision; of-course there are other factors such as job opportunities, cost of living etc. But for large amount of immigrants CGT plays a big role after they settle down in a new country.
ericb 17y ago
This is cool, but we incorporated in January. If this passes, do we redo it now?
- sethg 17y ago
  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.
Darmani 17y ago
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.
- antpicnic 17y ago
  The article says: "To qualify as a small business, the corporation, when the stock is issued, may not have gross assets exceeding $50 million (including the proceeds of the newly issued stock) and may not be an S corporation."
- adamsmith 17y ago
  "..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..
  - dpifke 17y ago
    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.
    - graphene 17y ago
      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?
nazgulnarsil 17y ago
too little too late mister president. I agree with winterspeak in that what we need is severely reduced payroll taxes to stimulate aggregate demand.
- natrius 17y ago
  I think pretty much everyone who has thought seriously about things agrees with you, but how can they get political support for raising other taxes to at least offset the loss in revenue, and preferably help with the ridiculous deficits we'll be running for a while?
  - dantheman 17y ago
    By not raising other taxes and cutting the massive government spending.
    - natrius 17y ago
      In the interest of not straying too far off topic, I'm going to leave this one alone.
    - nazgulnarsil 17y ago
      to be fair. this has no precedent in the 20th century.
- ibsulon 17y ago
  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.)
mchristoff 17y ago
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?
- drusenko 17y ago
  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).
  - anamax 17y ago
    > 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.
    - ajju 17y ago
      If you are a co-founder and stayed with a company for five years before exit, wouldn't you qualify for this no-tax clause?
    - Radix 17y ago
Tichy 17y ago
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 17y ago
  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..
bigbang 17y ago
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?
rdl 17y ago
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.

63 points by yokumtaku 17y ago

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?

gambling8nt 17y ago
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.
dreamz 17y ago
there are many countries with no CGT (Capital Gain Tax).. http://en.wikipedia.org/wiki/Capital_gains_tax http://en.wikipedia.org/wiki/Capital_gains_tax http://www.globalpropertyguide.com/Asia/Hong-Kong/capital-gains-tax http://www.globalpropertyguide.com/Asia/Hong-Kong/capital-ga... it would be really interesting (for the people migrating to other countries for better opportunities) if someone compares cost of living in different countries based on their CGT ... may be this would really change the whole scenario ... for example if a family wants to decide between new-zealand and canada and lets say that their total saving (as per history) is around 10 to 20% which they regularly invest in real-estate/stock then CGT can change their decision or help them to make decision; of-course there are other factors such as job opportunities, cost of living etc. But for large amount of immigrants CGT plays a big role after they settle down in a new country.

ericb 17y ago

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

sethg 17y ago
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.

Darmani 17y ago

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.

antpicnic 17y ago
The article says: "To qualify as a small business, the corporation, when the stock is issued, may not have gross assets exceeding $50 million (including the proceeds of the newly issued stock) and may not be an S corporation."
adamsmith 17y ago
"..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..
- dpifke 17y ago
  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.
  - graphene 17y ago
    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?

nazgulnarsil 17y ago

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

natrius 17y ago
I think pretty much everyone who has thought seriously about things agrees with you, but how can they get political support for raising other taxes to at least offset the loss in revenue, and preferably help with the ridiculous deficits we'll be running for a while?
- dantheman 17y ago
  By not raising other taxes and cutting the massive government spending.
  - natrius 17y ago
    In the interest of not straying too far off topic, I'm going to leave this one alone.
  - nazgulnarsil 17y ago
    to be fair. this has no precedent in the 20th century.
ibsulon 17y ago
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.)

mchristoff 17y ago

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?

drusenko 17y ago
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).
- anamax 17y ago
  > 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.
  - ajju 17y ago
    If you are a co-founder and stayed with a company for five years before exit, wouldn't you qualify for this no-tax clause?
  - Radix 17y ago

Tichy 17y ago

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 17y ago
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..

bigbang 17y ago

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?

rdl 17y ago

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.