Press Room: Tax Release

November 18, 2011

Last Chance for the Last Dance

A poorly understood provision of the tax law expires at the end of this year and its demise will hurt angel investors in particular.

Since September 2010, individual investors (and some investment funds) have been able to make certain investments in companies that will qualify for a zero percent federal capital gains tax. To qualify, the investment first must be a direct purchase of stock from a C corporation that has less than $50 million of asset value on the date of the investment. Then, the stock needs to be held for five years. If the investor sells the stock at a gain after that, basically up to $10 million of that gain can be totally free from federal taxes.

A variation of this law has been around for a while, but September 2010 marked the first time the law really had any kick to it. Before then, the benefit was almost always nil because Congress didn’t really construct the provision to provide any real benefit.

To take advantage of this special benefit you need to invest after September 2010 and BEFORE January 1, 2012. There is not much time left; here is some food for thought.

  • Of course, if you have the opportunity, invest directly before the end of this year.
  • If you are RAISING money, keep this provision in mind – it should be an incentive for investors to act.
  • If you anticipate making a follow-on investment in the next 12 months or so, consider doing it now. A follow-on next year won’t qualify. If you are thinking of raising another round next year and your possible investors include existing owners or likely prospects, consider offering to take the investment today and park it in a special account. You may be able to make an arrangement where you can negotiate final valuations next year so long as the stock itself is issued.
  • Back in the days when the stock market only went up and start-ups enjoyed liquidity events in a few years, a five-year holding period was inconceivable for many investors and so the provisions of this law were not often considered relevant. Now that the prospect and the time horizon of liquidity events is often longer term, the five-year holding period does not seem as onerous.

As with many opportunities that are this good, it should not be expected to last very long. So grab this while you can!

Please consult your WTAS advisor to see if this opportunity is an option for you.