Small Business Stocks To Buy 2017
For decades, corporate consolidation has been accelerating. In over 75% of U.S. industries, a smaller number of large companies now control more of the business than they did twenty years ago. This is true across healthcare, financial services, agriculture and more.
small business stocks to buy 2017
Inadequate competition holds back economic growth and innovation. The rate of new business formation has fallen by almost 50% since the 1970s as large businesses make it harder for Americans with good ideas to break into markets. There are fewer opportunities for existing small and independent businesses to access markets and earn a fair return. Economists find that as competition declines, productivity growth slows, business investment and innovation decline, and income, wealth, and racial inequality widen.
Over the past four decades, the United States has lost 70% of the banks it once had, with around 10,000 bank closures. Communities of color are disproportionately affected, with 25% of all rural closures in majority-minority census tracts. Many of these closures are the product of mergers and acquisitions. Though subject to federal review, federal agencies have not formally denied a bank merger application in more than 15 years.Excessive consolidation raises costs for consumers, restricts credit for small businesses, and harms low-income communities. Branch closures can reduce the amount of small business lending by about 10% and leads to higher interest rates. Even where a customer has multiple options, it is hard to switch banks partly because customers cannot easily take their financial transaction history data to a new bank. That increases the cost of the new bank extending you credit.
The TCJA allows small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period to use the cash method of accounting. The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017.
If the holding period for the optimum exclusion is not met, gain can be deferred by reinvesting proceeds in stock of another qualified small business within 60 days of the sale. To use this deferral option, the stock merely had to be owned for more than six months.
If you have a C corporation or are thinking of forming one and you are in an eligible industry described earlier, consider using qualified small business stock to raise capital or compensate key employees. Talk to a tax advisor to make sure that all conditions for being a qualified small business are met before you proceed.
In the weeks heading into May 17, Kolanovic said funds bought bonds and bond proxies, sending low volatility stocks and large growth stocks higher. Value, high beta and smaller stocks began falling in a rotation labeled "an unwind of the 'Trump reflation' trade," Kolanovic said.
Sec. 1202(a) provides that a noncorporate shareholder can exclude 50% of the gain from the sale of qualified small business (QSB) stock that has been held for five years.3 QSB stock must be stock in a C corporation; thus, Sec. 1202 is generally not available to exclude gain on the sale of S corporation stock or a partnership interest.
Sec. 1202 was added to the Code as part of the Revenue Reconciliation Act of 1993,6 with the stated purpose of providing targeted relief for investors who risk their funds in new ventures and small businesses. At the time, long-term capital gain was taxed at the same rates that apply to ordinary income, subject to a maximum rate of 28%.
The primary motivation for Sec. 1202 is to encourage capital investment in small businesses; this is the very reason for the requirement that QSB stock be acquired by the shareholder at original issuance. In the absence of a safeguard, corporations could evade the requirement that QSB stock be newly issued stock by redeeming non-QSB stock from a shareholder only to reissue it as QSB stock. To prevent this result, the statute provides two restrictions governing redemptions.
As discussed earlier in this article, for stock to meet the definition of QSB stock, the issuing corporation must be a C corporation on the date of issuance. Thus, if an S corporation that otherwise meets all the requirements of a qualified small business under Sec. 1202 issues stock, that stock can never qualify as QSB stock, even if the S corporation later converts to a C corporation.
36Sec. 1202(e)(1). This requirement is waived for a corporation that is a specialized small business investment company (SSBIC). An SSBIC is any eligible corporation (under the meaning of Sec. 1202(e)(4)) that is licensed to operate under Section 301(d) of the Small Business Investment Act of 1957 (as in effect on May 13, 1993). See Sec. 1202(c)(2)(B).
40See also IRS Letter Ruling 201717010. In the ruling, the IRS concluded that a business that performed and analyzed medical tests using patented technology and prepared laboratory reports for health providers was not itself performing services in the field of health. The IRS reached its conclusion, in part, because the taxpayer did not explain test results to patients or recommend treatment.
42See also IRS Letter Ruling 201717010, in which the IRS concluded that the principal asset of a business that performed and analyzed medical tests using patented technology, and prepared laboratory reports for health providers, was not its employees, because the skills employees brought to the taxpayer were not useful in performing the tests, and the skills they developed while working for the taxpayer were not useful to other employers.
Section 12021 is a once-obscure tax saving provision that has come into prominence in the last few years. Originally passed in 1993 as a 50% capital gain exclusion, it has been amended several times since. In its current iteration, Section 1202 allows for a 100% capital gain exclusion for the sale of qualified small business (QSB) stock (QSBS), if its requirements are met, and subject to caps.
One important requirement is that the issuing company must be a domestic C corporation. After the 2017 Tax Act, which substantially cut the U.S. federal corporate tax rate to 21% (from 35%), using a C corporation for a new business has become far more popular. In sum, the current tax climate can making an investment in a C corporation very tax efficient if the investment is in QSBS.
Because of the considerable tax benefits, one such opportunity, Qualified Small Business Stock (QSBS), has become an integral part of planning for small and growing businesses and business owners. For practitioners advising these clients, one of the new questions of the day is if and how QSBS fits into in the new and growing FinTech industry.
Women-owned firms in the Arts, Entertainment, and Recreation sector rose 10.5%, from 22,219 in 2017 to 24,542 in 2018. The 10 sectors shown in the chart below also saw growth in women-owned businesses.
Internal Revenue Code Section 1202 may offer a generous tax benefit for private equity groups and venture capitalists. Section 1202 permits a taxpayer, other than a corporation, to exclude up to 100% of the gain from the sale or exchange of qualified small business stock (QSBS) held for more than five years. Originally enacted in 1993 to encourage investment in small companies, Section 1202 initially granted a 50% exclusion of gain, which was later increased to 75% for QSBS stock acquired after February 17, 2009 and then to 100% for QSBS stock acquired after September 27, 2010.The investment in QSBS can be made either directly by an individual or by an eligible pass-through entity, which can be defined for these purposes as an S corporation, partnership, regulated investment company or common trust fund. Private equity (PE) groups and venture capital (VC) firms will be eligible to invest in QSBS in most cases, as they are typically taxed as partnerships, and should consider the potential tax benefits offered by such an opportunity.The percentage of excludable gain under Section 1202 depends on the year in which the stock was acquired, and the holding period of QSBS begins on the day after the date the stock was issued, regardless of whether the QSBS is received in a taxable or non-taxable transaction. The exclusion of the gain can provide PE funds and VC a valuable tax savings opportunity upon their exit from an investment in a qualifying small business.
The Protecting Americans from Tax Hikes Act of 2015 made the 100% exclusion under Section 1202 permanent and, despite the current political climate to increase taxes on capital gains, there are no plans to change this taxpayer-favorable provision. Once a portion or all of a gain is excluded from income taxation, it is no longer subject to the alternative minimum tax (AMT) or the net investment income tax of 3.8%.However, for QSBS acquired after August 10, 1993, and on or before February 17, 2009, the taxable portion of the gain is subject to a capital gains tax rate of 28%, and 7% of the gain excluded from gross income on the sale of QSBS is an AMT preference item, meaning that this amount must be added back to income in determining alternative minimum taxable income, which is subject to marginal AMT rates of up to 28%.Section 1202 was unutilized for years from its enactment, largely because the non-excludable portion of the Section 1202 gain is taxed at 28%, which is notably higher than the reduced tax rates applicable to capital gains from the sale of non-QSBS (which is based on taxable income but the highest current rate is generally 20%). Using a 50% exclusion, half of the gain would have been taxed at 28%, resulting in an effective tax rate of 14% when the long-term capital gains rate was 15%, thus mitigating much of the benefit that was otherwise intended since the savings were only 1% and could have resulted in additional AMT. It was not until recent years that Section 1202 attracted the attention of founders and PE groups since the 100% exclusion for original issuance stock after September 27, 2010 started applying around five years ago (after September 27, 2015 since there is a five-year holding period), as the 28% special tax rate becomes moot if 100% of the gain is excluded.The importance of Section 1202 was amplified by the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. The TCJA reduced the corporate tax rate from 35% to 21% and eliminated the corporate AMT. Although the individual income tax rate was reduced from 39.6% to 37%, under the TCJA individuals may be able to reduce their effective tax rate to 29.6% if their income is eligible for the 20% qualified business income deduction under Section 199A. Despite the lower corporate income tax rate, most investors were historically advised to operate businesses as flow-through entities (i.e., partnerships and S corporations), largely because C corporations are subject to double taxation. The double taxation results in a combined corporate and shareholder tax approaching 40% (21% corporate rate and 23.8% dividend rates on 79% of the distributable income), which is still much higher than 29.6%. However, if earnings can be retained in the business to support continued growth and expansion, and if a second level of tax could be avoided by using the QSBS provisions, it follows that Section 1202 could fundamentally change the choice of entity dynamic for founders and other investors, including PE groups.President Biden has recommended raising income taxes on corporations from 21% to 28%, as well as raising taxes on high wealth individuals. He has also suggested raising the ordinary individual income tax rate to 39.6% for taxable income of more than $400,000 a year, and increasing the long-term capital gains tax rate to 39.6% for those with taxable income exceeding $1 million. The capital gains tax rate could go up to 43.4% when considering the net investment income tax of 3.8%.While the doubling of the long-term capital gains tax rate may seem alarming to many investors, the silver lining is that Section 1202 will offer a remarkable federal tax saving of up to 43.4% for founders and investors before taking into account possible state income tax savings, assuming all of the requirements as discussed below can be met. The Biden administration plans do not currently include a proposal to amend Section 1202, since to do so would arguably discourage start-up business activities, especially now when businesses are trying to recover from the COVID-19 pandemic. 041b061a72