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Should angels get a special tax credit?
Anne Field

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Sep 01
2010

Should angels get a special tax credit?

Posted by annearf in tax credits, Small Business Innovation Research, small business, investment, angels

annearf

There's a bill pending in Congress to give angels who invest in certain companies a 25 percent tax credit.  Whether it would benefit anyone other than angel investors is unclear.

The legislation, the Innovation Technologies Investment Act, would give angels the tax credit for investments in startups receiving Small Business Innovation (SBIR) grants. The federal SBIR program provides funding to small businesses engaged in innovative research. It's meant to encourage more investment in these startups, which tend to have a lot of promise and, possibly, the potential to create jobs.

Of course, many angels are 100 percent behind the proposal. Like anyone else, they'd like to see their tax bill reduced.

But there are some questions about just how effective such a step would be. On the one hand, angels make risky investments and a 25 percent tax credit is sizable enough that it could provide an added incentive to take a chance on a particular business. 

On the other, it might mean giving tax credits to angels for making investments they would have done anyway. The situation is similar to current legislation awarding tax credits to small businesses that hire when many of those companies might have brought on more employees even without the extra tax help. The upshot: The government collects less tax money, at a time when it needs every penny, but there's no significant increase in investment. According to small-business expert Scott Shane, he's seen little evidence that tax credits make much of a difference to angels.

There's also the matter of limiting the credit to SBIR-funded companies. These businesses win that support because they have a potentially knock-em-dead technology, not necessarily because they're going to employ a lot of people in the near future.

Ultimately, using tax policy to encourage investment in startups isn't a bad idea. We just need to be careful to give the right incentives to the right people. Shane proposes a cut in the capital gains tax for shareholders in startups as an alternative. He argues that could make a bigger difference to startup creation, attracting a larger population than just angels, in a wider spectrum of companies. That's worth a shot.


 

 

 

 

 

 

 

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