II. Supporting Small Business Advancement and Job Generation
A loop-hole free incentive tax credit should be provided to unaffiliated individuals (often friends, family members and supportive members of a business owner’s local community) who provide long-term equity capital to qualifying privately-held, U.S-based small businesses which conduct primary research and development and manufacturing operations in the U.S.
Tax credits for small business investors
In recent years, the term “angel investor” has come to mean individuals who invest in privately-held startup or emerging growth companies and meet the Securities Exchange Commission’s definition of an “accredited investor” or “qualified investor.” These individuals have a personal net worth of over $1 million or stable annual income over $200,000.
Angels continue to be the largest source of equity capital for new and developing companies. It is estimated that angel investors may provide up to 90% of the outside equity raised by startups after exhausting capital contributions from friends and family members and company founders. Angels represent approximately 45% of funding for “seed” stage companies; 40% of “early” stage companies; and 14% of “expansion” stage companies. It is at these earliest stages of company development that bank financing is least available to entrepreneurs.
While it is difficult to track all angel investment activity in the U.S., the Center for Venture Research at the University of New Hampshire reported that over 55,000 entrepreneurial ventures received funding from over 258,000 angel investors in 2008. Total investments were approximately $19 billion. Unfortunately, the total amount of funds invested dropped 26% in 2008 and is expected to drop further in 2009.
It’s important to note that there is another kind of angel who helps fund the development of new small businesses across America. These angels are the family members, college buddies, neighbors and business colleagues of startup entrepreneurs and small business owners. They often provide the first funds to incorporate a business, hire a patent attorney, buy office equipment or secure a first lease for office space. While they may not write checks as large as most accredited angel investors, their contribution to local economic development should not be overlooked.
To help prevent future declines in angel investment activity and minimize the risk associated with providing capital to privately-held companies during a recessionary climate, TakeCommand proposes to provide a federal tax credit to accredited investors as well as “friends and family” investors who make direct long-term equity investments in qualifying startup and early stage small businesses (up to three years old) that endeavor to develop and manufacturer new products, materials or systems technologies in several targeted global growth industries such as agriculture, clean power generation, energy-saving consumer products, electronics, telecommunications and mobile technologies, security, and healthcare.
Other recommended provisions include:
New businesses that require less startup funding or capital intensive research and development to bring new products and technologies to market would not be eligible for angel investment tax credits. These industries include professional services, real estate development, wholesale and retail, construction, leisure and hospitality, banking, insurance, entertainment and transportation.
Each qualifying business, certified by a regional Small Business Administration office, would be able to generate up to $5 million in total tax credits for angel investors.
Angels would receive a tax credit of up to 10% on the first $500,000 invested in one or more qualifying businesses; and a lower percentage for subsequent investments.
The tax credits would be available during a four year period -- preferably 2010 to 2012.
The amount of the tax credit would lower the angel’s investment cost basis for calculation of future capital gains or capital losses.
States that have provided tax credits to support investment activity in small businesses have demonstrated that they generate more investment activity for growth-oriented businesses. That’s good news for ambitious entrepreneurs who seek startup and expansion capital and its good news for new job creation.
TakeCommand recognizes that there is the potential for loopholes in the proposed initiative. Our intent is not to help individuals receive tax savings through investments in companies that are not organized for any other reason than to provide a one time tax shelter.
Further, we acknowledge that one motivation to provide tax credits for investments in privately-held small businesses is to stimulate development of businesses and technologies that will create lasting new jobs in the U.S. To this end, this proposed initiative should be restricted to investments in U.S. based companies that conduct primary research and development as well as manufacturing operations in the U.S.
We encourage a tax credit for individual investors (often friends, family members and supportive members of an entrepreneur’s local community) who provide equity capital to legitimate, unaffiliated startup and growth-oriented enterprises that are domiciled in the U.S. and do not subcontract development or other operations to other countries or off-shore partners.
