A sweetheart tax break for angel investors is among a costly horde of “tax extenders” enacted in the fiscal cliff legislation that provide special relief for particular industries and investments, according to The New York Times.
Public disapproval has led to a recent decline in direct spending by Congress. Instead, so-called “tax extenders,” which provide temporary or permanent tax relief, are the new rage in the tax legislative process, The Times reported.
The new fiscal cliff legislation contains a “bonanza” of 52 tax extenders. Some — which run a gamut that favors film and television productions, Nascar sites, rum production, fossil fuels and clean energy — have already drawn media attention.
Editor's Note: Tiny Loophole Found in 70,320 Page IRS Tax Code Could Pay $87,500
“The temporary nature of extenders reduces their estimated costs; budget estimates assume that the provisions will sunset as promised, instead of being extended each year, as most in fact are,” The Times said.
For instance, the tax extender for angel investors, who are often the earliest investors in a start-up compamy, is projected to cost the United States about $1 billion in revenue — assuming it is not renewed.
The angel investor “loophole” provides a zero percent tax rate on capital gains, presuming the angel investor holds on to the investment for five years, up to the greater of $10 million or 10 times the original cost basis of the investment.
Under the provision, the founder of a company who contributes only labor can avoid paying tax on the first $10 million in profits, while an angel investor who put in $2 million can avoid paying tax on the first $20 million in profits, The Times reported.
Proponents of the angel investor tax extender argue that start-ups tend to create new jobs, thus should be encouraged.
But The Times noted that it is unclear the tax break is necessary to encourage such investments, which can have a high payoff if successful.
The angel investor extender is retroactive to 2012. “It is hard to see how a tax break provides incentives for investments that were either made, or not, last year,” the newspaper reported.
The Time concluded tax extenders have become a “comfortable method of extracting campaign donations from industry and doling out tax breaks in return.”
The Washington Examiner calculated the total annual cost of the tax extenders in the fiscal cliff compromise at $67.7 billion for 2013.
The National Review reported that figure is very close to what President Barack Obama hoped to collect on high-income earners — about $62 billion.
“It looks like the additional tax revenue will go mostly to pay for these big-business subsidies,” the National Review said.
Editor's Note: Tiny Loophole Found in 70,320 Page IRS Tax Code Could Pay $87,500
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