Senator Baucus (D-Mont.) Speaks in Favor of 0% Capital Gains Tax Rate for Startups

Today (see floor schedule) the United States Senate will resume consideration of the Small Business Jobs and Credit Act of 2010.

The bill will exempt from capital gains tax gains on qualified small business stock acquired after March 15, 2010, and before January 1, 2012, and held for more than 5 years. The House has already passed this tax incentive.

This is what Senator Max Baucus had to say about this yesterday on the floor of the Senate.

In 1976, the United States economy was reeling from recession. America’s unemployment hovered around eight percent. That year, two guys named Steve started selling computer kits out of a garage in Palo Alto, California.

They founded a small business. An angel investor helped them with $250,000 in seed money. Today, we know that business as Apple. Last month, Apple became the largest technology company in the world.

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According to a recent report, nearly all net job creation in America from 1980 to 2005 occurred in firms less than five years old. In fact, without start-ups, net job creation would have been negative almost every year for the past three decades.

In 2007, more than two-thirds of the jobs created were in firms between one and five years old.

As our economy emerges from the Great Recession, we need to ensure that American entrepreneurs have the resources, financing, and opportunities that they need to create jobs and realize their dreams.

This small business jobs bill would help American entrepreneurs access the capital that they need by increasing the incentives for investors to purchase and hold equity in start-ups.

Under this bill, for the rest of 2010, any investor who invested in a small business and held that investment for at least five years would pay no income tax on the gains from the sale of that small business stock.

It is a great idea, and one that will certainly be a boost for startup company investment. We need more angel investments like the one the Senator referred to.

It is unfortunate that the tax incentive is only for a limited time period, but perhaps it will be extended and ultimately made permanent.

Recently, Brad Burnham at Union Square Ventures wrote:

We have commented a number of times in a number of ways on this blog about how technology startups can no longer afford to ignore politics. …Everything is suddenly impacted by public policy and we no longer have a choice about engaging in the process.

I agree with Brad. The startup community needs to be more vocal politically.

The tax bill is a good example. On the one hand we are trying to make entrepreneurship easier but on the other hand we have already made the lives of startups more difficult and are doing nothing about it.

For example, the Dodd-Frank bill’s legislative language reduces the number of people who qualify as accredited investors (reducing the number who can act as angels to invest in startups and accordingly reducing the capital available to startups), and on the other hand we are about to offer a tax incentive to invest in startups. This is a conflicting set of policies that at some level doesn’t make sense.

Another example, Senator Baucus speaks wisely about startups needing capital, yet we have bad laws which require startups to spend money on foolish things that don’t create value–like 409A valuations, or the new healthcare bill’s 1099 requirement. We need a global, coherent legislative strategy to make the lives of startups easier and better.

I like the temporary tax incentive the Senate is considering, but it would be nice if the small business bill did other things to make the lives of startups easier rather than just pass a temporary tax incentive. 

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About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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