Fiscal cliff compromise includes tax incentive for angel investing

Yesterday, Joe Wallin blogged about what many may consider a surprise provision in the fiscal cliff compromise legislation.

The provision is a resumption of a tax benefit for angel investing in startups.

Voting in House finalThere are strings and conditions, of course, but essentially it gives angels the benefit of a zero capital gains rate for investments made in "qualified small business stock" that is purchased within a set time frame and held for a minimum number of years.

Startups benefit as the recipients of the additional private investing spurred by the tax incentive; the funded startups then take those investment dollars and create jobs.

As usual, Joe's got the technical details on his blog.

I asked Joe a few follow up questions by email, and below are his replies.

Questions for Joe Wallin:

Q: Joe, the House last night approved the Senate compromise on the fiscal cliff. It seems like it's essentially a tax bill. You wrote in your blog yesterday that this fiscal cliff legislation actually includes a tax break to encourage angel investment in new companies?

A: Yes, it does. It renews the 100% exclusion under Section 1202 for investments made prior to the end of 2013.

Q: But that 100% exclusion had expired a year ago, had it not?

A: Yes, it had expired at the end of 2011.

Q: So if the 100% exclusion is retroactive to include investments made in 2012, after expiration of the exclusion at the end of 2011, what's the policy rationale? It's too late to make any new investment decisions in 2012. Why not make the exclusion pick up again at investments made in 2013 and going forward?

A: It definitely does apply to investments made in 2013. As for investments made in 2012, it may incentivize investors to meet the five year holding period. Patient investors are good for startups.

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