Startup and Investor Considerations of the Tax Cut and Jobs Act
The Tax Cut and Jobs Act (TCJA) has been signed into law. We’re still in the first 90 days, and for the foreseeable future, accountants and attorneys will be working through the implications.
Here are some things to know about the TCJA that can affect angels and new companies. The first three because changes that had been under discussion in one form or another weren’t included in the final legislation.
- Gains on Qualified Small Business Stock (Section 1202) will continue to be 100% exempted.
- The R&D Tax Credit also continues, as does the ability for startups to take up to $250,000 of the credit against their employment taxes.
- Stock options and restricted stock units will continue to be taxed when they are exercised, not when they vest.
This legislation changes some things that may affect angels (as investors) or young companies, if they have taxable income or invest in capital assets.
- Corporate tax cuts will accrue to thousands of small businesses formed as C corps. If conditions are met, the tax rate is capped at 21 percent.
- Small businesses (the pass-throughs like Sub S Corps, LLCs, sole proprietors, and partnerships) will get a 20 percent deduction on “qualified business income” before the income hits the owner’s individual return.
- Section 179, direct expensing of capital assets for small businesses rises from $500 to $1 million. Although it is highly unlikely that there are many small businesses that put hundreds of thousands into capital assets.
Our industry, from representatives from individual venture capital firms like Rev1, to the national trade organizations, the Angel Capital Association (ACA) and the National Venture Capital Association) (NVCA), have been vocal and successful in communicating with members of Congress about issues that affect our industry.
And legislators should pay attention. Nearly all net new business growth over the last 25+ years comes from companies that have been in business less than five years.
There is much heavy lifting yet to do. These items warrant consideration: making the R&D credit work for startups, simplifying and expanding the Small Business Stock (QSBS) rules, safe harbor protections for startups from the Net Operating Loss limitations, and tax deferral provisions for exercised stock options for startup employees.
Consult Your Tax Advisor
Rev1 employees are not tax advisors and do not offer tax advice. We recommend that investors, entrepreneurs, and startup companies always consult legal counsel and/or tax advisors about tax or legal matters.