It's tax season already. This post is based on this one over here and I am not a tax person so please consult a professional. I thought I'd make a short post about the crazy tax incentives behind the crazy amounts of money that get thrown around in technology and startups. It's ridiculous to say the least.
Imagine owning stock in a company where the price appreciates greatly, you sell it, and pay no tax on your profit. That’s what can happen with qualified small business stock (QSBS). Also referred to as Section 1202 stock because that’s the section in the Tax Code that governs it, QSBS can be a significant planning tool for the right company, such as a tech startup.
The Illinois Angel Investment Tax Credit Program encourages investment in innovative, early-stage companies to help obtain the working capital needed to further the growth of their company in Illinois. Investors in companies that are certified as Qualified New Business Ventures (QNBVs) can receive a state tax credit equal to 25% of their investment (up to $2 million). A total of $10 million in Angel Investment tax credits are allocated in CY 2019, 2020 and 2021. Credits will be released by quarter, on a first-come first-served basis. Once tax incentive credits for a particular quarter are exhausted, no further credits can be allocated until the subsequent quarter.
A $100,000 investment in a company and get a 50x exit.
Without Tax Incentives
You risk roughly $62,000 when in the highest tax bracket. You get a return of $3,775,000 (After taxes).
With QSBS & QNBV
You risk roughly $38,000 when in the highest tax bracket. You get a return of $5,000,000 (After taxes).
What a crazy difference these incentives make.