Wednesday, November 26th, 2014

The Obameter

Eliminate capital gains taxes for small businesses and start-ups

"Barack Obama understands that small businesses are the engines of our economy, and he will eliminate all capital gains taxes on investments in small and start-up firms."

Updates

A compromise extended

In an effort to spur small business spending, President Barack Obama promised in 2008 to eliminate capital gains taxes on investments made by "small and start-up firms”. His rating on this promise currents stands at Compromise, following a brief window of full tax exclusion for qualifying investments provided for in the Small Business Jobs Act of 2010.

The exclusion rate was set to revert back to the pre-stimulus level of 50% on January 1, 2011, but it was extended through this year as part of the tax cut compromise that President Obama reached with House Republicans in the lame-duck session of the 111th Congress.

As before, only businesses registered as C-corporations under the federal tax code with no more than $50 million in gross assets qualify for the full exclusion. In addition, investments must be held for five years.

So because the tax cut compromise again extends the rates only temporarily, and with the same limitations as before, this promise remains rated as a Compromise.

Sources:

Thomas, HR 4583

U.S. Senate Committee on Finance, S.A.4753: The Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

A short-term fix

During the 2008 campaign, Barack Obama laid out a strategy for economic recovery that included targeted tax breaks aimed at spurring job creation, particularly by aiding small businesses. One of those small business tax breaks that Obama proposed was the complete elimination of capital gains taxes on investments in "small and start up firms”.

Capital gains taxes are taxes on profits made on the sale of an asset. Rates vary mainly depending on the type of asset sold and how long the asset has been held, with higher rates for assets held less than a year.  When Obama took office, investors were allowed to exclude from taxation 50% of the profit made from putting money into small business.

We last checked on this promise in February, 2009, and rated it "In the Works” because of progress made under the American Recovery and Reinvestment Act, better known as the stimulus. A provision tucked into the act raised the percentage of small business investment excluded from capital gains tax from 50% to 75%. That provision was to be in effect for the 2009 and 2010 tax years.

Eighteen months later, Obama and House Democrats sought to increase the exclusion as part of small business legislation they labored to get through Congress during the summer of 2010. The finished product, the Small Business Jobs Act of 2010, signed by the president Sept. 27, 2010, went further -- but with some limitations.

First, the elimination of capital gains tax on small business investment applies only to investments held for five years. What"s more, the exemption only applies to investments made from the bill"s enactment through the end of 2010. On Jan. 1, 2011, the exemption goes back to the pre-stimulus level of 50%.

"He kept his promise, but we don't think it will help many small businesses”, said Melissa Sharp, a spokeswoman for the National Federation of Independent Business.

Sharp"s contention is that by limiting the tax break to investments to one type of small business, C-Corporations, with less than $50 million in assets, that much of the provision"s usefulness is curbed. She said that less than 25% of small businesses are eligible under those rules.

Those who crafted the bill claim that the tax break appropriately targets those who would benefit from the exclusion, that most ineligible businesses are operations such as restaurants and doctor"s offices that wouldn"t necessarily be making significant investments subject to capital gains taxation.

Nonetheless, we"re focused on whether Obama fulfilled the promise he made on the campaign trail more than two years ago. Since the law effectively eliminates capital gains taxation for some small businesses, but only for investments made before the end of 2010, we rate this as a Compromise for the White House.

Sources:

Barack Obama campaign site, "Barack Obama"s Comprehensive Tax Plan”

Interview: Melissa Sharp, National Federation of Independent Business, November 9

Senate Finance Committee, Summary of Small Business Jobs Act, Aug. 5, 2010 (.pdf document)

Speaker of the House Web site, "Small Business Jobs Act”

Thomas, Small Business Jobs Act of 2010, Sec. 2011

White House Blog, "President Obama Signs Small Business Jobs Act - Learn What"s In It, Sept. 27, 2010

Stimulus reduces but does not eliminate

Deep within the text of the humongous economic stimulus bill — more formally known as the American Recovery and Reinvestment Act of 2009 — lies a small bit of text that changes capital gains taxes for small business.

When you sell an asset for a profit, that profit margin is your capital gain, and the IRS taxes you on it. Capital gains taxes vary depending on the income level of the tax filer and the length of the investment.

The stimulus bill address the case of people who make money after they've invested in a small business. Currently, these investors are able to exclude 50 percent of their gain from capital gains taxes when they invest in small business, as an incentive to entrepreneurship. The stimulus bill raises that exclusion to 75 percent.

The reduction is not everything Obama said he would do, but it's a substantial portion of what he sought, so for now we're going to rate it Compromise. But we'll be watching his future budgets to see if if the capital gains taxes are further reduced on small businesses, in which case we might need to change our ruling.

Sources:

Thomas, The American Recovery and Reinvestment Act of 2009 , Sec. 1241

Speaker of the House Web site, Joint Explanatory Statement: Section B , Feb. 12, 2009 (pdf document)