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Small Business Investment Incentives – US vs. UK

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As reported in the Angel Capital Association news-letter last week, The House passed the “Tax Increase Prevention Act” (TIPA) that amongst other things would exclude 100% of capital gains on the stock of small businesses acquired in 2014 and held for more than five years.  It also eliminates the gain as an Alternative Minimum Tax preference item.  The bill will hopefully go to the Senate this week where the pundits are fairly confident it will pass.  The real question is whether the President will sign it. Details can be found here – section 136.

As an angel investor, investment banker and former non-exec board member in the United Kingdom, I can only marvel at their Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) as incentives for investment.  In the SEIS scheme investors can claim income tax relief of 50% of the amount subscribed, with an individual investment limit of £100,000 ($157,000) each year.  The EIS scheme has an annual maximum investment of £1,000,000 and offers 30% income tax relief.   (There are special rules for accredited VC groups.)  Additionally, there are no, yes, no capital gains when the shares are redeemed in both programs.  There are some reasonable caveats including that the company must be accredited (primarily validating that it is a high risk, early stage concern) and the investment must be held for three years.

While there are some states in the US that offer similar incentives, such as the Seed Capital Tax Credit in Maine, none are as generous as the UK program that I am aware of.  More importantly, most often state taxes make up a small portion of our actual tax burden.

It is well established that small business is the growth engine of this country.  In fact according to the SBA’s Office of Advocacy: “Small firms accounted for 63 percent of the net new jobs created between 1993 and mid-2013 (or 14.3 million of the 22.9 million net new jobs). Since the end of the recession (from mid-2009 to mid-2013), small firms accounted for 60 percent of the net new jobs. Small firms in the 20-499 employee category led job creation.”  More great facts on small business can be found here.

Second to the intrepid entrepreneur, it is often the angel and institutional investors willing to take the chance on these small high-risk businesses that are most important to their success.  We need the government to appreciate the risk these folks take and the important role they play in our economy, and provide the appropriate incentives to keep their capital flowing.  While provision 136 of TIPA is a good start – assuming it gets passed – we are still lagging far behind programs in other parts of the world and the UK’s SEIS / EIS programs in particular.

You can find more of Patrick’s insights and experiences here or contact him at west@merger.com.