Capital Ideas For Small Business

Tax strategies could help provideneeded resources for minority firms

When the Republican revolution stormed the Capitol in 1994, Congressional Black Caucus member William Jefferson (D-Louisiana) was among the early causalities who lost their seats on the influential Ways and Means Committee. His loss was particularly notable to small business owners because during his term, Jefferson spearheaded initiatives that would potentially move $1.2 billion from the private sector into venture capital pools for minority businesses. But everything old is new again. Now Jefferson’s back and ready to pick up where he left off–in search of additional pools of capital that will help grow successful minority- owned companies.

If black-owned businesses are to grow and expand, “they must get past this capital problem or what the experts call `the capital gap,’” says Jefferson. To that end, he is targeting a provision under Tax Code Section 1202. As the legislation now stands, a noncorporate taxpayer could receive a 50% capital gains exclusion for a direct long-term investment in qualified small business stock. The investment must be for a minimum of five years. Jefferson hopes to amend this legislation to ensure that it applies to all specialized small business investment companies (SSBICs) grandfathered under recent amendments to the Small Business Investment Act. He also wants to see the bill changed to include gains realized by corporations that purchase stock or partnership interests of SSBICs.

Other targets include provisions under Tax Code Section 1044. Currently, gains from the sale of any publicly traded securities can be rolled over by purchasing an interest in a SSBIC. The roll-over period is currently 60 days from the date of the sale, and individuals are limited to $50,000 per year of gain with a $500,000 lifetime gap. Corporations face an annual limit of $250,000 and a cumulative limit of $1 million. Jefferson wants to make a number of amendments to enhance the code for small businesses. He hopes to modify the code to include all grandfathered SSBICs, and extend the rollover period to 180 days. Jefferson also wants to increase corporate and individual limits, and permit them to roll over any gains up to their respective cumulative limits in one year. “It’s more difficult to find a suitable investment on an annual basis when the amount is so low. This makes the investments more attractive for larger transactions and will attract more money into SSBICs,” says Jefferson. And with more time to make a decision, investors, he believes, will have more flexibility and time to make the right choice.

Sounds good, but will it work? After all, many entrepreneurs are still feeling the loss of the broadcast certificate program that provided an incentive to sell broadcast properties to minorities. Jefferson believes that these tax incentives will spur the growth of minority businesses and the national economy because of an increase in employment and tax bases. And because the measures are targeted to assist smaller-owned businesses, rather than being race-specific, the initiatives should be relatively safe from affirmative action critics who would cry foul.

“I think the chances are very good [that]

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