Senator Mark Pryor has introduced legislation that would give angel investors in qualifying small businesses (broadly defined) a federal income tax credit equal to 25% of the amount invested. You can find the text of the proposed legislation here and quoted in full below.
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I can’t take credit for today’s suggestion–I heard it from Tom Alberg at the Northwest Regional Angel Capital Association conference. Tom’s idea is worth advocating for.
Internal Revenue Code Section 1045 allows taxpayers (other than corporations) that have held qualified small business stock for more than 6 months to defer the gain on the sale of such stock if they reinvest the proceeds of the sale in qualified small business stock within 60 days of the sale. (Think of Section 1045 as the equivalent for startups to Section 1031 for real estate.) This is a very beneficial provision, because you have to meet a 5 year holding period to benefit from the Section 1202 exclusion from income.
The trouble with Section 1045 is that 60 days is a very short period of time in which to identify and invest in another company. It typically takes investors several months to identify and make investments in qualified small businesses.
For the benefit of startups, the Startup America Initiative team ought to advocate that this 60 day period be extended to something on the order of 1 year, or perhaps 270 days, to allow investors time to find investments in an orderly manner and be able to take advantage of Section 1045.
If you are interested in the latest proposal from the administration on the new Form 1099 requirements, this was what was included in the analytical perspectives that accompanied the budget. As you can see, the proposal does not completely do away with the requirement that persons in business issue Forms 1099 to corporations (except tax exempt corporations) with whom they do business.
Repeal and modify information reporting on payments to corporations and payments for property.—Generally a taxpayer making payments to a recipient aggregating to $600 or more for services or determinable gains in the course of a trade or business in a calendar year is required to send an information return to the IRS setting forth the amount, as well as the name and address of the recipient of the payment (generally on Form 1099). Under prior law this information reporting requirement did not apply to payments to corporations or payments for property. Effective for payments made after December 31, 2011, the Affordable Care Act expanded the information reporting requirement to include payments to a corporation (except a tax-exempt corporation) and payments for property. The Administration recognizes the burden that this expanded information reporting provision will put on small businesses and proposes to repeal the provision. Instead, the Administration proposes that a business be required to file an information return for payments for services or for determinable gains aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation); information returns would not be required for payments for property. This proposal would be effective for payments made after December 31, 2011.