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Here’s How to Get an Additional $750 Million in Small Business Investment

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Washington is still looking for ways to spur more small business growth. So far, all of the attempts have done little to produce a measurable uptick in the amount of small businesses not only opening their doors but also hiring new workers.

From the perspective of Washington, that’s really what’s it’s all about. They want to help future entrepreneurs open their business but in the end, the goal is for those new and old entrepreneurs to hire employees. One study found that from the 1970s through the Great Recession that started in 2008, nearly all hiring came from companies that were five years old or younger. The conventional thinking that large companies accounted for most of the jobs isn’t true.

With this in mind, the Kauffman Foundation, the nation’s largest foundation dedicated to spurring small business growth, funded a study to see if proposed legislation found in the 2011 Startup Act would have a meaningful effect on small business growth if it were made permanent.

In the Startup Act there is a provision that would allow investors to write off all capital gains from investing in a small business providing they remained invested for at least five years. For many investors, capital gains taxes, which are as high as 35% for some, severely degrade their net profits making investors weary of putting money to work in risky ventures. By removing the capital gains tax on small business investment, the added risk of investing in a startup is mitigated by up to 35% extra profit they could receive.

What if this were made permanent? According the Kauffman Foundation study, this would result in more than $750 million of extra seed money that would enter the small business community and this would help small businesses get through the common problem of running out of capital before the business can thrive.

Not everybody is convinced. Opponents of this legislation believe that this opens up a series of loopholes that would allow investors to speculate on these companies while still netting the capital gains exemption. They believe that the more complicated tax laws get, the easier it is for people to abuse the system.

Regardless, the study proves that if this legislation eventually becomes law, a lot of money will funnel in to the small business community. In an environment where finding capital is extraordinarily difficult, this would be welcome news.