Both the U.S. Senate and the House of Representatives have passed a bill temporarily forestalling the “fiscal cliff” and closing at least the opening round of negotiations on tax policy. While the bill postpones sequestration – the mandated budgets cuts to defense and non-defense discretionary spending – it only does so for two months, meaning the Administration and Congress will be back at the negotiating table in short order. The new deadline on sequestration coincides with the expected deadline on increasing the nation’s debt ceiling.
For the venture industry itself, the bill is generally good news, albeit temporary in nature. As expected, the final legislation sent to the President returns the capital gains rate to 20% for individuals with income above $400,000 or families with income above $450,000. With the addition of the 3.8% capital gains tax mandated under the Affordable Care Act, the capital gains tax rate in 2013 will be 23.8% for most VCs. The Administration had pushed aggressively for a higher cap gains rate, but was unsuccessful in that effort. Also significantly, the measure does not include any change to the taxation of carried interest. As we move forward into overall tax reform, we would therefore not anticipate any further increase in the capital gains rate, but we fully expect to see carried interest as a part of the discussion.
For venture backed companies, the bill offers a two year extension of many tax policies such as the Section 25C credit for energy-efficient improvements to existing homes, the ITC and the PTC, as well as the cellulosic biofuels producer credit. However, the bill does not provide any relief for medical device companies facing the excise tax mandated under the Affordable Care Act.
The impact of this agreement will go beyond the immediate term. The temporary cliff provisions in the new law may necessitate that Congress delay serious tax reform discussions until the second half of the year. While world markets are up today, the continued fiscal uncertainty likely will not assuage the markets in the first quarter which continues to seek long term stability. In sum, the agreement hammered out over the Holidays presents the venture and entrepreneurial communities with some pressing unresolved issues that could impact us in 2013. However, NVCA is confident we can navigate these shoals and have a prosperous 2013.
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