On October 14, we will be hosting at our downtown Seattle office (1201 Third Ave., Ste. 2200) a debate on Initiative 1098, which would impose an income tax on Washington residents. The potential economic impacts of Initiative 1098 are hotly debated. If you are interested in reading the text of Initiative 1098, a copy of the initiative is embedded via Scribd below.
We are honored to host Bill Gates, Sr. who will be arguing the pro side, and Matt McIlwain, from Madrona Venture Partners, who will be arguing against the initiative.
We hope you can join us for what we think is going to be a very lively debate, including audience Q&A and reception.
Register for the event at the WTIA website and we look forward to seeing you.
5:30-6:00 Reception and networking
6-7:30 Debate, Q&A and post-debate reception
When the Senate returns on September 13th, it will take up consideration of the Small Business Bill (the “Bill”).
The current version of the Small Business Bill was introduced August 5th as Senate Amendment 4594, an amendment in the nature of a substitution.
My comments on the Bill:
- The 100% exclusion for capital gains from investments in qualified small business stock is temporary and of extremely short duration. It only applies to stock purchased after the date of enactment of the Bill through the end of this year. This is not really much to get excited about. If we want to change behavior, the provision should be permanent. Allowing an exclusion of 100% for qualified small business stock purchased before the end of this year probably isn’t going to change much in terms of behavior. Investors who intended to invest this year probably will. Those who didn’t plan to invest this year probably won’t.
- There is no Form 1099 relief for small businesses. In fact, the penalties for failure to file information returns are increased in the Bill, and the events requiring 1099 reporting are being increased–the Bill requires persons receiving rental income from real property to file Forms 1099 to the IRS and service providers reporting payments of $600 or more during the year for rental expenses. So, for example, if you own rental real estate and pay your plumber $601 during the year, you are going to be required to issue your plumber and the IRS a Form 1099.
- The $600 threshold for information reporting needs to be adjusted for inflation. As the Congressional Research Service reported earlier this year:
“Also potentially affecting the administrative burden on payers is because the $600 threshold, which triggers the reporting requirement, has remained constant over time, since at least 1954. In contrast, other dollar amounts specified in the IRC have been legislatively increased over time or indexed for inflation. For example, the personal and dependent exemption amounts were $600 in 1954, but over time have risen to $3650 for tax year 2010. As the buying power of $600 decreases, the number of transactions captured may increase as it becomes more likely that minor expenditures will aggregate to at least $600 and trigger the reporting requirement. “
Thank you to Scott Shane for writing about the recently proposed Innovative Technologies Investment Incentive Act of 2010 (the “Bill”) (The Bill is embedded via Scribd below.) And thank you to Bill Carleton for alerting me to Shane’s article.
I agree with Shane that the Bill has problems. However, I like the general idea. We have an employment problem in this country. We need to find ways to translate money that is on the sidelines into jobs. What better way to do that than allow investors whose money goes to employ people a dollar for dollar tax credit for their investment? I know of no better idea. Besides, what would the harm be in trying it to see if it works? What would FDR say? I say, let’s do it–and let’s see what happens.
My suggestions to improve the Bill are:
- don’t limit the credit to investments in companies that receive SBIR grants; allow the credit for investments in all companies as long as they use the invested funds to employ people; I think relatively simple rules could be put in place to ensure that invested capital was used to employ people;
- make the tax credit dollar for dollar; in other words, if an investor invested $100,000 in a company that used the funds to employ people, that investor would receive a $100,000 credit against the investor’s tax bill that year; don’t put any complex phase outs or anything of that nature in the bill; make it simple; make sure that this “credit” wasn’t an alternative minimum adjustment;
- revise the act to expressly allow these investments to be made without regard to any securities law registration or exemption requirements; in other words, free up anyone to invest, not just “accredited investors”; and allow companies to advertise for funds and expressly have the federal law supersede any conflicting state securities laws.
The trouble with investing in the stock of companies, from a tax perspective, is that you cannot recover your invested capital (your tax basis) until you sell the stock. If you buy property, plant or equipment, at least from a tax perspective you can recover your basis over the reasonably expected life of the property, plant or equipment. Not so with stock. You have to wait to recover your basis until you sell the stock. This encourages, I believe, at least in part, the build it to flip it mind set, which is not necessarily the best viewpoint for building long term value.
I think the Congressional representatives who proposed the Bill are on the right track, but they need to be bolder. Again, my suggestions are as follows:
- Don’t tie the credit to investment in companies that have received SBIR grants; make it available to any company that uses the invested capital to employ people.
- Don’t limit the credit to 25% of the invested amount–allow an immediate credit against taxes owed for all amounts invested–if the amounts invested are used to pay employees.
- Repeal all securities law restrictions for making these types of investments.
By Garry Fujita and Joe Wallin
The taxation of director fees under the Washington State business and occupation (“B&O”) tax remains in a state of evolution. The Department of Revenue (“DOR”) published a Special Notice on June 22, 2010 and recently published a contract that companies can accept with the DOR to remit the directors’ B&O tax obligations. Although the DOR has published the Special Notice, there remains many questions without clear answers.
Q: I am a wealthy philanthropist. I want to make gifts to companies that I think are doing exciting work, making exciting products that I think might change the world, and employing lots of people. I don’t want to buy stock. I don’t want to hassle with negotiating securities purchase agreements. I just want to give the money to the companies as a gift. Can I do this? And if so, can I write off my contribution to these companies as a charitable contribution?
A: If companies are willing to accept your cash, you can certainly give it to them. There is no law that prohibits the giving of funds to private companies.
Can you take a charitable contribution deduction for the contribution? No, because the private companies are not going to be charitable organizations to which contributions are deductible under the federal tax law.
Unfortunately, the Internal Revenue Code does not provide a deduction for these types of gifts.
Congress ought to act on this. We need rules that allow people to give cash to startups and to take a deduction if their contribution is creating jobs and helping the economy.