By: Valerie Gaydos Chairman, Treasurer Private Investors In Entrepreneurial Endeavors (PiPAC)
While the criticism of angel tax credit legislation written in the August 20 article “The Problem with Tax Credits for Angel Investors” has some merit, the author fails to notice what is right about this legislation as well as the other pieces of legislation which are more inclusive or offer other ways to help propel entrepreneurship. Tax credits can indeed be extremely valuable to both angel investors and entrepreneurs by encouraging private capital to invest. However, tax credits are only one small piece of the puzzle. The legislation discussed is indeed far too limiting as it only offers a tax credit for investing in SBIR investments. Limiting the tax credit to SBIR companies is like inviting people to a party they can not attend. It certainly might be one way for Congress to keep the cost down but it will have very little impact since there are a limited number of companies that would be eligible, especially to angel investors. (Note: The sponsor of the legislation is from Maryland where a number of government funded companies are located.)
Another and fairly substantial issues which plagues all of the tax credit bills is the issue of Alternative Minimum Tax (AMT) since a tax credit may trigger an AMT liability. The alternative minimum tax began as a way to ensure that taxpayers pay at least a minimum amount of tax but the whole system is flawed. While some investors oppose the tax credit on that grounds, it would not effect all recipients of an angel tax credit and frankly, it is too big of an issue to be addressed in one small angel tax credit bill. Instead, the AMT system should be part of an overhaul of our entire tax structure.
Editor's note: NASVF welcomes guest editorials to NetNews. Their comments and content do not necessarily represent the membership and staff of the NASVF organization----Richard Miller
The AMT was introduced by the Tax Reform Act of 1969 and became operative in 1970. It was intended to target 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time. There were several changes over the last few decades that weakened the initial intent. Now many taxpayers who do not have high incomes or participate in any special tax shelter activities have to pay AMT. http://www.nytimes.com/2007/03/04/weekinreview/04johnston.html?_r=1
HR 5864 introduced by Congressman Sestak (D-PA) provides for a tax credit for angel investors and provides for the tax credit to all start up investments, not just limited to companies that the government already invested. While the SBIR tax credit is helpful, the language in the Sestak bill is far more inclusive and was written using the language of legislation introduced by Congressman Manzullo and Pomeroy in 2006 which was not only extremely well vetted already and had bipartisan support, but had successfully passed the house. Currently, HR 5864 is in the House Ways and Means Committee and should be the legislation which is given greater consideration since it addresses some of the issues that are not addressed elsewhere. (http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.5864 )
Nonetheless, the most comprehensive solution is not just one or two quick or partial fixes or legislation which may help one Congressman and the companies in his district. The real solution would be for the whole of Congress to understand that businesses need a combination of incentives (or reduction of disincentives) which are provided at all steps in the process of financing and building the business, not just at the beginning (tax credits and angel capital rollover) or at the end (capital gains tax reductions). Companies need business building incentives (enhanced relief for capital losses) while they are growing a company. If a company can not survive to get to an exit, then tax credits and capital gains are of limited value. Companies need most help to survive, thrive and hire while they are building their business. While tax credits and capital gains tax preference or exemptions are beneficial, more relaxed loss limitation provisions are a more direct and effective way to increase investments into companies and which provides a real tangible benefit to companies while they are growing. Taxes in excess of income consume capital that could otherwise be used to fund the hiring of more employees and the growth of the company.
Please take action by writing to your congressman and telling him/her to support a whole package of incentives to help businesses grow including HR 5864 since it is a bill that will actually help the economy by encouraging investments in all start-up companies, not just a limited few.
http://campaign.constantcontact.com/render?v=001nphfS6MPjGnRM32G_29p9gC_VIdrJbJLvvCzU5hhAv3ou-nnFPyBKOvKpd6bp4-HC5lfSK1lIypfrWBVOKwvRV4bLv8RWEXHYRDzaN7Ai1w%3D
http://www.pipacusa.org/
Contact: PiPAC (http://www.pipacusa.org) is a non-partisan and non-connected Federal political action committee that was created and is led by a very independent group of successful private equity investors, business leaders, entrepreneurs and professionals with a shared vision to preserve and encourage the stability and growth of emerging businesses that fuel an American free market economy with high wage, high skilled jobs, lasting growth and sustainable wealth for all. If you have any questions, please contact Valerie Gaydos Chairman, Treasurer PiPAC at This email address is being protected from spambots. You need JavaScript enabled to view it.