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Treasury Notes

 Startup America: How a Small Business Tax Cut will Support Innovative, High-Growth Companies

By: Michael Mundaca
2/1/2011

On Monday, the President announced Startup America, a campaign to celebrate, inspire, and accelerate high-growth entrepreneurship throughout the country.  This exciting initiative builds upon the many policies the Administration has targeted to support small and entrepreneurial businesses.
 
For example, recognizing the unique issues that small businesses and startups face in accessing capital, the President created the Small Business Lending Fund and the State Small Business Credit Initiative as part of the Small Business Jobs Act he signed last September. In addition to these initiatives to spur small business lending, the Act included eight tax cuts for small businesses that provided over $12 billion in tax relief. This tax relief adds to the eight small business tax cuts the President had previously signed into law.
 
One of the Act’s tax cuts created a 100 percent exclusion from tax for capital gains realized on the sale of certain small business stock held for more than five years that was issued after enactment during 2010. This built upon a previous increase in the amount of the exclusion from 50 to 75 percent in the Recovery Act. In the tax cut package passed in December, the 100 percent exclusion was extended to apply to small business stock issued through 2011, and on Monday, the President announced his proposal to make it permanent in his 2012 Budget.
 
So, why is this important?
 
Startup businesses embody the very notion of the American Dream – that any American with a good idea and the determination to make it a reality can build a successful business. Recent research also shows that many startups have made outsized contributions to job growth, so enabling these entrepreneurs to succeed will create jobs.
 
Though America is known as a place where entrepreneurs thrive and the spirit of innovation is strong, even in the best of times, startups are at a disadvantage when it comes to accessing capital. Often lacking sufficient collateral or the existing cash flows to justify large loans, entrepreneurs must use whatever means are at their disposal to get the funding to start a business, including their own credit cards or home equity lines of credit.  
 
These challenges are particularly acute in the wake of the worst financial crisis since the Great Depression, as lending has constricted even for long-standing and successful businesses. For example, a recent economic commentary from the Cleveland branch of the Federal Reserve shows that the decline in housing prices is adversely affecting small business owners’ ability to secure credit, because many borrow against their homes or other residential real estate.
 
The provision to eliminate capital gains taxation on certain small business stock will create an incentive for people willing to invest in a good idea. Because the provision requires that these investors hold the stock for five years to take advantage of the tax cut, investors share in the success – or failure – of the business.
 
Startup America encapsulates the very best of public-private partnership, where the federal government works as a catalyst for private sector investors and entrepreneurs to create thriving businesses and the jobs of the 21st century. The small business capital gains exclusion is just one vital component among many the Administration has put in place to enable these entrepreneurs to succeed.
 
 
Michael Mundaca is the Assistant Secretary for Tax Policy.
Posted in:  Small Business
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