Eliminate capital gains taxes for small businesses and start-ups

Stimulus reduces but does not eliminate

Updated: Thursday, February 26th, 2009 | By Angie Drobnic Holan

Deep within the text of the humongous economic stimulus bill — more formally known as the American Recovery and Reinvestment Act of 2009 — lies a small bit of text that changes capital gains taxes for small business.

When you sell an asset for a profit, that profit margin is your capital gain, and the IRS taxes you on it. Capital gains taxes vary depending on the income level of the tax filer and the length of the investment.

The stimulus bill address the case of people who make money after they've invested in a small business. Currently, these investors are able to exclude 50 percent of their gain from capital gains taxes when they invest in small business, as an incentive to entrepreneurship. The stimulus bill raises that exclusion to 75 percent.

The reduction is not everything Obama said he would do, but it's a substantial portion of what he sought, so for now we're going to rate it Compromise. But we'll be watching his future budgets to see if if the capital gains taxes are further reduced on small businesses, in which case we might need to change our ruling.

Sources:

Thomas, The American Recovery and Reinvestment Act of 2009 , Sec. 1241

Speaker of the House Web site, Joint Explanatory Statement: Section B , Feb. 12, 2009 (pdf document)