Small Companies May Benefit From Reduction In Capital Gains Tax Rate

While many people regard changes in the capital gains tax as a matter solely for the rich, it also has significant implications for small business.

Experts almost universally insist that a cut in the capital gains tax rate almost certainly would generate more investment in start-up businesses and existing small companies.

Which is one reason why delegates to the annual White House Conference on Small Business rate it high on the list of concerns.

“An attractive capital gains rate makes investment more attractive,” said Larry Massey, a partner at Winkler Forner & Massey, a general accounting practice specializing in helping small businesses with tax, audit and accounting services.

“Investment is essential to small business and to the economy, because if you don’t have investment your economy will shrink,” he said.

He noted that small businesses account for more than half the job growth in the United States over the past decade, figures backed up by government and other advocacy organizations.

Politicians recognize its importance as well. Both the Contract with America and the Democratic counterproposals have key elements concerning cuts in the capital gains rate.

Still, many entrepreneurs aren’t familiar with the capital gains rate or how it affects small business. Here’s what the experts say about it and why small businesses should be concerned.

Most of all, it’s a way to find capital through non-bank means. Historically, most banks have been reluctant, at best, to take risks on loans to small business. The exceptions include governmentguaranteed loans such as those offered by the U.S. Small Business Administration.

Still, investors are always on the lookout for better returns than those provided by today’s savings methods. And a small company - Apple computers would be a wildly successful example - could provide a comparably huge return.

The return on that investment is considered capital gains. Like profit from the increased value of a publicly traded stock, it’s subject to capital gains tax.

So, theoretically, the lower the capital gains tax, the more incentive to invest, and the more money available for small businesses.

The two competing capital gains reforms being pushed by both major parties are similar in that they both want to exclude 50 percent of capital gains from being taxed - meaning only $50,000 of a $100,000 gain would be taxed.

The biggest difference in the plan is that the Democrats want a fiveyear holding period on stock before allowing the tax break on returns. The GOP plan calls for no holding period.

Many familiar with the capital gains tax say both proposals have merit.

“The reforms being proposed would liberalize the rules so companies in formation would find it easier to attract dollars,” said Archie Milligan, senior vice president of San Francisco Federal Bank.