Could Capital Gains Tax Break Encourage Business Incorporation?

There is some interesting legislation surfacing that could fuel business incorporation. President Obama is backing a proposal that eliminates capital gains tax on investments made in 2010 and 2011 on qualifying small businesses. "We should eliminate all capital gains taxes on small business investment so these folks can get the capital they need to grow and create jobs " said Obama at a February Town Hall meeting in Nashau, N.H. "That's particularly critical right now, because bank lending standards are tightened since the financial crisis and many small businesses are still struggling to get loans". The president believes in the proposal and so do the majority of small business owners according to a recent poll. PNC Financial Services Group polled 500 small business owners and 60% believe the proposal would benefit small business.

The tax break does not support all business incorporation or benefit all investors. The tax break applies only to individual "angel" investors who invest in the early stages of small privately held corporations.

Sorry LLCs and S-corps, you can only qualify for the tax break if you invest in a C-corporation with assets of less than $50 million. Other restrictions prevent newly incorporated businesses in fields like farming, accounting and law, restaurants and hotels, or banking and finance from benefiting. The tax break is geared towards corporations in fields that are believed to have high-job growth potential such as manufacturing and technology.

Also, the investor has to purchase "original issue" stock. Original issue is stock purchased directly from the company. Additionally, the stock must be held for at least five years.

What about AMT? The alternative minimum tax (AMT) is a tax structure that is aimed at eliminating deductions from high income filers. Those investors that would have the cash flow to support business incorporation are generally subject to AMT exposure. In this proposal the impact of AMT is eliminated 100%.

Before you form an opinion on the new proposal, let's look at the current law. Under current law, the exclusion for purposes of the regular income tax system of 50% of the recognized gain on the disposition of qualified small business stock (which was increased recently under the American Recovery and Reinvestment Act to 75% for issuances after February 17, 2009) is substantially undercut by the combination of the high 28% rate of tax applicable to the non-excluded portion of the gain under the regular income tax and the AMT rules.

Of course with any legislation there are going to be supporters and skeptics. But small business owners are hopeful that investors will have an incentive to give business incorporation a shot in the arm.

To learn more about how Capital Gains Tax Break Encourage Business Incorporation click here: http://www.ezonlinefiling.com/incorporate-1.php