There’s a tax-free way to invest in small businesses — but 87% say laws too hard to figure out

NEW YORK — Nearly nine in 10 Americans believe the government should do more to incentivize the creation and investment in small businesses. Interestingly, a new study notes that such a program already exists — but the country’s tax laws are just too hard for most people to understand.

A survey of more than 1,000 adults, commissioned by CapGains, Inc., shows that 87 percent of Americans think the current tax incentives for investing in small businesses are too confusing to take advantage of. It’s an unfortunate problem because four in five respondents (80.4%) say they would likely start a new business or invest in a startup if there was a tax-free option available.

There actually is a tax-free option available!

The team at CapGains, Inc. notes that the U.S. government created the Qualified Small Business Stock (QSBS) tax incentive in 1993 — nearly 30 years ago! Under Section 1202 of the Internal Revenue Code, an eligible small business shareholder can receive up to 100 percent off in capital gains taxes.

Lawmakers originally created QSBS to spur innovation in early-stage companies that meet certain conditions. These include having less than $50 million in gross assets, focusing on a scalable type of company (not companies where a person is the product — like a doctor), and applying the company’s assets towards a qualified trade or business.

However, as many businesses are still getting back on their feet after the pandemic, Congress is now considering an overhaul of QSBS. This would slash the tax exemptions to just 50 percent for people with an Adjusted Gross Income of more than $400,000. The proposal is part of the stalled “Build Back Better” infrastructure bill, which supporters are defending as a way to raise more tax revenue.

For more perspective, the Joint Committee on Taxation estimated that the tax revenue lost from small business investors using QSBS was $1.2 billion in 2019. However, Build Back Better may cost up to $3.5 trillion, driving opponents of the bill to question whether the cost to small businesses is worth it.

Is America falling behind the rest of the world?

Despite the government’s claims that this would be a good move, respondents in the poll think America’s economy is going in the wrong direction. In fact, 87 percent say the U.S. needs to keep pace with other countries who provide more incentives for small businesses and startups.

Interestingly, more than 75 percent of the respondents make less than $125,000 a year and four in 10 (39%) have started their own small business.

“QSBS is the reason we took the risk… It’s the reason the founders and early employees took gigantic pay cuts and zero benefits, because it was worth the risk due to an incentive put in place by the government. The incentive worked, we have a valuable asset based on 9 years of hard and under-paid effort,” one small business founder tells researchers in a statement.

A recent study found that six in 10 small business owners think the current level of inflation in the U.S. will eventually put them out of business. Moreover, seven in 10 Americans now say they’re living paycheck to paycheck — making tax breaks even more appealing, if you can understand them.

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