Did you know gains on qualified startups held for 5 years are 100% exempt from capital gains taxes up to $10 Million per investment?

And did you know that the State of Illinois allows up to 25% Tax Credit for Illinois Angel Investors investing in qualified Illinois QSBS Startups?

Venture investing is a lot more interesting thanks to the Protecting Americans from Tax Hikes (PATH) Act. The PATH Act aims to incentivize early-stage venture investors by providing 100% tax exemptions up to $10 million per investment to investors in qualified small business stock (QSBS) of companies with assets of $50 Million or less.

This means that investments in qualified startups can yield even more upside than they have in the past. For example, let’s say you invest $100K into a startup with a $5 million post-money valuation and hold that investment for 5 years. Assuming the company is acquired for $50 million 5 years from now, you could expect your investment to be worth as much as $1 million. Historically, that $900K gain would be subject to a 20% long-term capital gains tax. Now the gain is 100% capital gains tax exempt, meaning you keep the entire $1 million returned on your investment, versus the $820K you would have received otherwise.

Simply put the winners in your portfolio are able to return substantially more than they would have in the past, increasing the overall expected return on your portfolio and reducing the risk associated with that performance. We think this is great news for investors.

Do you want to learn how you can build a diversified portfolio of qualified startup investments?

Do you want to become part of the world’s fastest-growing private digital investment network?

Sherpa Capital is a private venture investment community with no management fees, capital commitments or carried interest. We would like to invite you to experience membership for 60 days, free of charge. We think you’ll love it, but if you don’t, simply let us know and you will never be charged. (Note: this offer is only available for accredited investors)

Tax Code: 26 U.S. Code § 1374 tax on built in gain for S corporations only applies for 5 years now. When a C corporation elects S corporation status or when an S corporation acquires assets of a C corporation in a tax-free transaction, it must determine its subchapter C built in gain—the excess of (i) the value of the assets of the C corporation at the time that the corporation’s subchapter S election becomes effective or the time that the acquisition of the assets of the C corporation by the S corporation is effective over (ii) the tax basis of those assets. If the S corporation sells those assets within five years of the date of the subchapter S election or the date of acquisition of those assets, the S corporation is taxable at the corporate level on the subchapter C built in gain. That five year period was reduced from ten years. A C corporation now only has to wait five years after the effective date of its subchapter S election before it becomes a completely pass-through entity.

26 U.S. Code § Section 1202 100% exclusion now permanent. Section 1202 allows a complete exclusion from tax on gain from the sale of stock of a qualified small business corporation. This may be a very attractive provision for startup companies that engage in a qualified business, in general any business other than personal services, real estate, farming or hotel management. Any C corporation engaged in a qualified business with aggregate gross assets having a value of $50 million or less may be a qualified small business. If an investor (other than a C corporation investor) holds the qualified small business stock for five years, any gain on the sale is permanently excluded from federal income taxation. This had been the treatment since 2010. This provision was annually extended. The PATH act made the 100% exclusion permanent. Incidentally, if qualified small business stock is disposed of after being held for six months but less than five years, the gain may be deferred if the amount realized (not just the gain) is rolled into new qualified small business stock within 60 days of the first sale. That latter rule was unaffected by the PATH act.

Some reading references on the subject:
https://techcrunch.com/2016/01/25/early-stage-investing-for-entrepreneurs-and-individual-investors-just-got-a-whole-lot-more-attractive/