September, 17, 2024 — ACA Board Chair Emeritus Marcia Dawood, joined by the Gray Robinson legislative team, gave testimony to the Ways and Means Committee’s U.S. Innovation Tax Team. Addressing Congressman Ron Estes (R-KS), Vice Chair Michelle Steel (R-CA) and committee member Representative Lloyd Smucker (R-PA), she spoke on the importance of expanding Section 1202 for angel investors and entrepreneurs. Currently, Congressman David Kustoff (R-TN) has legislation which would shorten the holding period on 1202 as well as count convertible debt as part of the overall holding period.
Her testimony was aimed to help policymakers understand how critical it is to incentivize angels to fuel innovation when they could invest elsewhere, as well as support entrepreneurs to build the innovative companies needed in the world.
The IRC Section 1202 allows shareholders in a company who have held the stock for more than five years to avoid any capital gains tax if there is a positive return. You can learn more about it in the Angel Next Door episode with Jeffrey Solomon, a partner at Katz, Nannis and Solomon in Boston, entitled, “Optimize Your Returns – Tax Tips for Investors and Entrepreneurs.”
Marcia’s testimony included that the Angel Capital Association believes that Section 1202 should not only be maintained, but that it should be expanded to include new provisions that will benefit investors and entrepreneurs alike. These enhancements have been proposed in Representative David Kustoff’s bill HR 2767 that called for the following:
Provide time spent under a Convertible Note investment to be counted in the holding period
Establish a phased in tax incentive beginning at 50% at year three, 75% at year four and maintaining a 100% exclusion for holding periods of five years or longer
Allowing corporate structures beyond just a C-Corp to be eligible for QSBS
While the House has passed these provisions, Marcia Dawood and the ACA Public Policy team, urge the Senate to take up the bi-partisan work of the House.
