Obama proposes no capital gains tax on qualified small business stock | Hacker News Reader

Obama proposes no capital gains tax on qualified small business stock

startupcompanylawyer.com

63 pointsyokumtaku43 comments

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?

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.

there are many countries with no CGT (Capital Gain Tax)..

http://en.wikipedia.org/wiki/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.

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

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.

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.

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."

"..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..

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.

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?

Yes, it matters. Most smaller companies tend to be service companies, because they don't have huge economies of scale. Most product companies tend to be larger -- it's easy to moonlight as a designer who figures out what box you should sell a lightbulb in, but you can't moonlight as the guy building the lightbulbs, because you need tens of millions of dollars to manufacture them profitably.

A subsidy to small businesses that didn't exclude service businesses would have the effect of making more people want to work for service companies. Which is fine, except that they produce negligible exports. If you're selling lightbulbs, you make money in India by selling them there; if you're a lawyer, the way you make money in India is by hiring an Indian lawyer in India, and somehow convincing this lawyer to give you a fraction of his billings (so most of the money stays behind).

Given the potential trade deficit problems, I suspect Obama wants to focus on subsidizing businesses that can export.

Good point.

Also, the income of a service company is mostly going into the pockets of the service providers, and if those service providers are well-paid then they're more likely to save their marginal dollar instead of spending it. So from a Keynesian point of view, this is not the kind of business you want to throw money at during a recession.

as for the proliferation of service comanies if they weren't exempted, I think the market should (and will) determine an appropriate supply of services, not the legislature. The fact that the bulk of these comanies will create negligible exports should not count against them any more than it should count against a product company which is only active within national borders.

The actual tax code defines "PSC" professional services corporations as described in the above summary, so I assume the implementation of this policy will just exempt PSCs by name.

Only consultants are out. If you're selling a product, you're fine. If you're offering some sort of cloud computing service, it sounds like you're fine. All the businesses listed sell people.

how so? i read it as meaning we're in. i doubt they mean engineering in the computer engineering sense, and even if they did, most of our business are consumer services, not engineering services. further, i wouldn't say the principal asset of the business is the reputation or skill of one or more employees -- presumably the asset is the software developed and the user base around it.

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.

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?

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).

> 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.

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.

What is the reasoning behind preventing people from investing into companies? Is it just to keep people from being swindled? It seems off to me.

> Is it just to keep people from being swindled?

That's the stated reason. Your guess is as good as mine as to whether it's a real reason or even the only reason.

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?

thx for clearing that up

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).

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..

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?

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

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.)

A sales tax break for goods originating from US is, in all ways, a trade barrier. You can expect global mutual treatment. That means decreased foreign demand for US products.

So you end up sponsoring US companies that were not capable to compete with more efficient foreign companies. Which is in itself a more interesting problem. Most European countries have as high, or higher, standard in working conditions (and TAXES!) and they do have positive trade balance.

Does it really seem like a wise decision to make US produced products less attractive on the global market, for the hope that tax cuts on domestic products will match up, and then some, with increased income tax from the new jobs?

An alternative is to instead use taxes to set up better public transport, so the time-and-cost-to-get-to-work radius around companies increase. Making it both easier to find the right competence (larger area, more people to chose from) and making more real estate close (time-wise) to the city, making the cost of living lower.

I agree with all these points, but the point I had been trying to make is that increasing spending in the face of a trade deficit means that we are doing more to spur China's economy than our own.

I'm not sure that the public transport makes a difference with our car culture and low population densities. I can't really think of a good way to do a subway in LA, for example, though they tried.

The goal is not to get you (or any other particular individual) to spend more, but to increase aggregate demand.

I'm assuming that the form of savings that you pursue is not "stuffing money under the mattress", but to put the money in the bank, or invest in equities or bonds or commodities.

If you invest in commodities, that is of course spending on commodities.

If you invest in stocks or bonds, you're providing capital to other companies, who will then spend it. This is good, but since some of their spending will be on facilities, it may not be the kind of spending we want (i.e., consumer good). On the other hand, some of it may go to paying for employees, which is obviously a very good thing, and goes to decreasing the uncertainty that you're concerned about.

And if you put it in the bank, it's going to be loaned out to either consumers for their own spending, or to business as discussed above. (caveat: so far this year, banks have tended to increase their reserves rather than increase lending. I think that phase is done, though)

However, the government is functioning like a corporation currently with its spending.

(And I'm not convinced banks are finished increasing their reserves. Wells Fargo is still in the danger zone after acquiring Wachovia, as one example.)

In a way, but it's doing so more like a drunken sailor than with any rationality.

The Austrian school says that recessions occur when the economy gets over-invested in some area. The recession occurs as we recognize that what we've invested in is not worth as much as we thought ("hey, these are just regular crackers!"). Then the values roll back as we get out of that dead-end while moving our investments into better values.

To the extent that this is true, our government is not helping. They're spending with abandon, but direction of the spending is either wildly shotgunned, or politically correct. With the decisions in the hands of the people and corporations making up the market (I think I can see you cringing as I say that), the processing of transitioning will in all likelihood be faster and much more efficient.

The increased demand would come as businesses would be more willing to hire new employees- as without payroll tax, it would be cheaper for them. If this increases the employment by 5% (Or even 1%) it would put a lot of people back to work- and your your job much more secure.

People further down the income scale are going to save less of their marginal income. If someone is working but for so little money that they're constantly thinking "this week, should I buy food, or try to catch up with the rent?", and their take-home pay suddenly goes up by $20 a week, they are not likely to put that $20 in a savings account.

http://en.wikipedia.org/wiki/Paradox_of_thrift

Also, I'm a big fan of a revenue neutral tax shift from payroll to energy/carbon.

you've missed the point in spectacular fashion. aggregate spending has been above incomes for years due to easy credit. of course at some point you need to increase savings to make up this shortage. the whole point of a payroll tax holiday is that it would get us through this phase faster and back to spending.

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?

By not raising other taxes and cutting the massive government spending.

In the interest of not straying too far off topic, I'm going to leave this one alone.

to be fair. this has no precedent in the 20th century.

Personally, I am a fan of the FairTax- it fits much better with a free Republic, as illustrated by many of the Founders(Like Thomas Jefferson) who greatly favored a consumption tax.

Reply on news.ycombinator.com