The Washington Post
Posted at 06:00 AM ET, 11/05/2012
By John Harrison and Olga Khazan
On Small Business
Entrepreneurs and the people, policies and businesses that make them go
Do tax rates really matter to start-ups?
Every other week, On Small Business reaches out to a panel of entrepreneurs for answers to the most pressing questions facing small business owners. Today, on the eve of the election, we delve into some of the hot-button political issues that affect business owners. The responses are provided by members of the Young Entrepreneur Council (YEC).
Q: Do tax rates really matter to start-ups? Do you think certain changes to the tax code would foster more entrepreneurial success?
Eric Corl, president and co-founder of Fundable LLC in Columbus, Ohio:
Tax rates are a moderate concern — both parties seem to grasp the impact that tax burdens have on small businesses and have collaborated across the aisle to enact entrepreneur-friendly tax laws in the past few years. It remains a key issue, however, because taxes are one of the biggest costs for most businesses, and can be a breaking point for struggling business.
In general, any tax incentives that can reduce tax burdens for startups as well as investors will help foster more entrepreneurship. Our nation was founded by innovative entrepreneurs and I’d love to see more political support for small businesses — they employ 50 percent of all private sector workers and represent more than 50 percent of the non-farm gross domestic product.
By providing tax incentives to entrepreneurs, the government has a phenomenal opportunity to bolster the U.S. economy.
Christopher G. Hurn, CEO and co-founder of Mercantile Capital Corporation in Orlando, Florida:
Tax rates are not and should not be that big of a concern for start-ups companies, since most will show losses in their early years; but they are a concern for startup investors, in that the more income startup investors keep, the more they’ll have to invest (whether in startup companies or other assets on which to earn a return).
When income tax rates are higher (or even raised from current levels), the “pool” of potential startup dollars (especially early stage capital from angel investors) is greatly diminished.
Certain changes to the tax code to diminish tax rates for investments made into startup companies (in addition to further lowering capital gains rates compared to earned income tax rates) would probably result in more startups being funded and quickly growing. However, until SarBox (Sarbanes-Oxley) is reigned in some for smaller firms wanting to go public, the IPO marketplace will not be as active as it could be and this exit strategy (liquidity event) is a major consideration for most sophisticated start-up investors.
Doug Bend, founder and small business/startup attorney at Bend Law Group, PC in San Francisco, California:
Most startups are extremely tight on cash. A few thousand dollars in tax savings can be the difference between a startup making or not making payroll, hiring a rock star programmer, proceeding with a new marketing initiative or doing any number of things that could make or break the start-up.
Senators Moran, Brown and Rubio recently introduced bipartisan legislation which, among other things, would create a research and development tax credit for startups of up to $250,000 or 20 percent of W-2 wages, whichever is less. This and similar tax credits would provide startups with the extra incentive to invest in themselves and by doing so not only create new jobs, but also innovative products and services.
The Young Entrepreneur Council (YEC) is an invite-only nonprofit organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.