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NEW YORK, NY, December 17, 2021 /24-7PressRelease/ -- The latest version of President Biden's tax and social spending plan, the Build Back Better Act (H.R. 5376), contains an often-overlooked subsection that will act to significantly raise taxes on small business shareholders and see incentives advanced by the Obama Administration to encourage investment and job growth disappear.
Initially enacted in 1993 as a tax incentive for small business owners, their investors, and early employees, the Qualified Small Business Stock (QSBS) program was expanded by President Obama to include a 100 percent exemption on capital gains taxes for key small business investments, "driving capital to as many as one million small firms across America, and, by the way, honoring a promise that I made as a candidate for President," Obama said upon signing the Small Business Jobs Act in 2010.
In a baffling reversal, President Biden's current proposal would cut QSBS gain exclusion rates to 50 percent–with a "real exemption rate" of less than 30%–a tax increase impacting millions of small businesses and entrepreneurs and jeopardizing national and economic security interests as China pours over a trillion dollars into tech to overtake the U.S.
Bobby Franklin, President & CEO of the National Venture Capital Association (NVCA):
"Startups are at the heart of the American economy, driving the majority of all new job creation, innovation, and opportunity for their employees. Our country's tax regime should advance these ambitions. QSBS has proven effective in promoting investment in startups and early-stage growth companies in regions and communities across the country. Preserving the current QSBS treatment makes good economic sense. We need every tool we have to continue our pandemic recovery. Now is not the time to make it harder for new businesses to succeed."
Kyle Richless, Co-Founder of CapGains Inc., a leading provider of software-enabled tax optimization tools for founders and investors:
"QSBS is the single most powerful tax incentive for startups and small businesses in the U.S. As China pours a $1.5 trillion investment into their own tech economic engine, draconian QSBS reductions mean American investors and entrepreneurs lose their most powerful tool to attract top talent, who need to overcome wages on average 30 percent below market value in their recruiting efforts. Similarly, by curbing the favorable QSBS tax treatment, the Biden administration is weakening the small business economy and creating a significant headwind in the innovation arms race with China."
Ishan Girdhar, Founder & CEO of Privva, Inc.:
"I was 17 days away from selling my business when the QSBS amendment was released, indicating that I would no longer receive the full exemption. My experience building a successful company put me in a position to invest in and mentor future companies, but the proposed QSBS amendment would deter me and others like me from investing in companies at their earliest stages, ultimately reducing job growth in the US."
Anthony Cimino, Head of Policy and Regulatory Affairs at Carta:
"If a goal of our country's tax policy is economic opportunity, it should maintain tax incentives that spur innovation and create more ownership of private companies. The QSBS exemption does both and has expanded the value that employee-owners can realize in the businesses they build. Curtailing the QSBS exemption might raise revenue in the short term, but it would be at the cost of diminishing the value of employee ownership and tamping down investment in startups and early-stage companies."
Jessica Karr, General Partner, Coyote Ventures:
"The startup ecosystem is full of innovators and investors who make early bets on companies that will change the world. We forego traditional wealth building opportunities to dedicate our time and resources here, often taking risks and many of these companies fail. That is why the upside must continue to be so rewarding - QSBS is a vital incentive."
Jonathan Fish, CEO and Co-Founder of CapGains Inc.:
"The Build Back Better Act needs to account for the central role startups and innovation play in powering our economy, job-creation, and our competitive positioning. We urge President Biden to protect the QSBS program, reject imposing new barriers to opportunity and success on hard working Americans, and to embrace the promise of viable and vigorous small business tax incentives so companies they can hire more people, invest, and grow."
The Small Business Jobs Act, signed by President Obama in 2010, excluded 100 percent of capital gains taxes on key small business investments if held for five years, up from 75 percent. According to the White House, over one million small businesses were eligible to receive investments that, if held for five years or longer, could be completely excluded from any capital gains taxation.
According to the Joint Committee on Taxation (JCT), potential revenue from the proposed QSBS cut would amount to less than 1% of President Biden's trillion-dollar infrastructure plan.
JCT currently estimates revenue gained by a slashed QSBS incentive would raise an estimated average of $570 million per year in new tax revenue over the next decade. According to Financial Times, despite the significant strides made in small business activity, investments in the earliest "seed stages" of private companies still make up only 4.1% of all venture capital financings. And that number has fallen in recent years relative to the "tsunami of money moving into late stage funding."
Early stage companies play a critical role in overall job creation. In a typical year existing businesses are losing jobs in aggregate (either through business closures or reductions in employment levels) while startups play an "outsized role" creating the jobs that drive net growth in overall employment.
For more information, or to support our efforts to preserve QSBS in its current form, contact [email protected].
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