Today there will be a House Ways and Means Committee mark-up of the Small Business and Infrastructure Jobs Tax Act of 2010 which was introduced on Monday, March 15 by Acting Committee Chair Sander Levin (D-MI).  A summary can be found here.

Proposals to provide a tax incentive for investments in small business originated under the Clinton Administration and are now known as the Section 1202 or Qualified Small Business Stock (QSBS) rules.  President Obama generated new buzz around this when he advocated taking that incentive to a new level – zero percent (100% exclusion) for investment in small business.  Chairman Levin’s bill puts legislative language around the President’s proposal, amending the current language of Section 1202 and increasing the exclusion for gain from 50 percent to 100 percent on the sale of certain small business stock (Qualified Small Business Stock) held for five years or more.  Importantly, only investments made between March 15, 2010 and the end of the year would get the benefit of the 100 percent exclusion.

The NVCA applauds the spirit in which this policy is put forth as it recognizes the importance to economic growth of emerging companies – and investment in those companies.  Yet there are two reasons why we are waiting to whole heartedly throw our support behind these well intended proposals: 

1. The Levin bill and the Administration plan thus far rely on increasing the exclusion as the mechanism to trigger increased investment.  Unfortunately, neither addresses the historical problem.  The exclusion depends on having an investment in a Qualified Small Business and to date most venture-backed companies have failed to qualify because of the complexity, administrative cost, uncertainty and out-dated parameters of the rules. If the companies can’t qualify, the investor can’t take the tax savings.  Unless Congress can simplify the process so that the rules work as Congress originally intended, it’s hard to see a significant increase in investment emerging.  Senators Kerry (D-MA) and Snowe (R-ME) have legislation that goes a long way in the right direction.  An excellent summary of the challenges of the current QSBS rules and potential fixes, authored by Proskauer Rose can be found here.
2. Policy makers have yet to take a holistic view of improving access to capital for emerging growth businesses.  The incentive created by a zero capital gains rate for investment in small business will be completely negated if Congress changes the carried interest tax rate for venture investing to an ordinary income tax rate.  These proposals are directly contradictory to one another.  The NVCA is calling for greater consistency in approach when addressing this issue.

The NVCA formally submitted our position on this issue at the Febraury 23, Senate Finance Committee hearing entitled, “Tax and Trade Issues Related to Small Business Job Creation”.  Our statement for the record can be found here. 

Access to capital for small businesses remains a top issue for NVCA and we plan to continue to advocate for tax policies that support a healthy ecosystem.