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Virginia to Entrepreneurs: Start Your Business Here – And Pay No Capital Gains Tax!

Capital Gains taxes on high-tech entrepreneurial startups are going away in Virginia – at least for three years.  Founders, Angel Investors, Venture Capital Fund Investors, Corporate Investors to benefit.

On Tuesday, March 30th, newly elected Republican Governor Bob McDonnell signed into law House Bill 523 (Senate Bill 428), which provides a 100% capital gains tax exclusion for founders of, and investors in, high technology start-up companies located in Virginia.

Virginia Governor Bob McDonnell & New Atlantic Ventures partner John Backus

Does this apply to me you might ask?  Well, here are the details:

1)   Your company must be a technology company (all flavors of technology from biotech to silicon-based products, to software to Internet new media)

2)   You must have had less than $3M in revenue in 2009

3)   You must raise outside capital during the period July 2010 – June 2013.

If you qualify, then when you sell your stock in your company, whether through a private sale of stock, a sale of your business in an M&A transaction, or through an IPO, you will pay no Virginia State Capital Gains tax on your sale.  Doesn’t matter if you sell your stock in three years, five years or twenty-five years.  That transaction will be tax-free.

In Virginia, like most States, we don’t have a separate tax rate for capital gains.  Our overall highest income tax rate is 5.75%.  This is what you pay on your salary as well as on capital gains.  And this is what you won’t pay when you start your high-tech business in Virginia over the next three years.

Why did Virginia do this?  I know a little bit about this as I was Co-Chair of incoming Governor McDonnell’s Technology Policy Working Group.  We had 40 tech executives in our working group, and offered a variety of recommendations for start-ups, health care IT, the role of the State’s Secretary of Technology and CIO, and broadband deployment.  We delivered our report in January – less than three months ago.  The capital gains exclusion was our top recommendation.  And it is now the law of the land in Virginia.  Pretty impressive speed from an idea to a law.

Don’t blink or you will miss my soundbite:

But why?  Like most States, Virginia faced a budget deficit.  $2B in the case of Virginia.  But unlike most States, Governor McDonnell did not turn to the taxpayers and ask for more money by raising taxes.  He cut programs and costs, some more painful than others.  But he did what you and I would do if we were spending more than we were earning.

More importantly, he did not buy in to the conventional wisdom that the only way out is to raise taxes or cut costs.  He found a third way.  Grow your economic base.  Sure, Virginia competes with other States in attracting large established companies.  SAIC and Hilton Hotels just made the decision to move their HQ here, and we hope that Northrop Grumman will do the same soon.  But attracting these companies costs real money, today, in the form of tax incentives.  So while increasing the dollar size of his pot of incentives for established businesses, the Governor also chose to try to attract high-potential startups.  Those companies that have the potential of each creating hundreds or thousands of jobs.

According to data from the National Venture Capital Association, over 20% of jobs in America today are in companies that at one point were venture-backed.  And all of our net job growth over the past 20 years has been through these high-potential startups.  Small businesses are great.  Small businesses that have the potential to be large businesses are even better.  This is the group that Virginia is after.

Virginia is already ranked by Forbes as the best State in America to do business in.  In addition to a low overall tax burden, and a low regulatory environment we are now aggressively targeting high-potential businesses with the right tax incentives.

Obviously, building a big company and not paying taxes when you sell your stock is great for founders and investors.  But it is also good for the State of Virginia.  Why?  Because Virginia has moved from a bottom 25 State thirty years ago in venture-backed companies to a top 10 state today.  The goal of this policy is to move to a top 5 state during the next four years.  The capital gains exclusion is smart tax policy.  It costs the State nothing today, when budgets are tight.  It will attract new companies to the State which will create new jobs, rent office space, buy computers and office supplies and otherwise grow our economic base.  And each of these companies will do so for many years.  Some companies will fail.  Many will be nicely successful.  And a handful will be the next Rosetta Stone in our backyard.  All of these companies will contribute to our economic growth. And the cost of success, while down the road, is a pittance compared to the economic benefit they will bring to Virginia over the next 5-10 years.

I was proud to have had a role in crafting this policy, and it shows that each of us can make a difference with public policy.  My philosophy is simple.  I want to find a way to stop bad ideas from becoming bad laws, and encourage good ideas to become law.

Virginia’s likely gain from this policy will perhaps come at the expense of border and nearby states like Maryland, North Carolina, Georgia, Pennsylvania, New York – all of whom are also struggling with their budgets.  As they raise tax rates and Virginia makes their tax rate disappear (at least for capital gains) entrepreneurs will increasingly look to Virginia as a home for their start-up.  But deep down I hope that these other States follow Virginia’s lead, and once again try to encourage entrepreneurial risk taking.  More importantly, I hope that the Federal Government stands up and takes notice.  With the long term capital gains rate set to increase from 15% to 20%, and then to 23% with the health care surcharge, we are sending the wrong message to risk-tolerant entrepreneurs.  In fact a local Congressional candidate, Keith Fimian, running against Freshman Representative Gerry Connolly from Virginia’s Fairfax County, has already picked up this issue.

Check it out:

Lets hope it can become a bandwagon!

COMMENTS

April 1 2010
by John Backus

Virginia to entrepreneurs: Start your business here and pay no capital gains taxes! Check out my blog post on new VA law. http://ow.ly/1tIYc

April 1 2010
by NewAtlanticVentures

From the NAV Blog: Virginia to Entrepreneurs: Start Your Business Here – And Pay No Capital Gains Tax! http://bit.ly/cAh5r7

April 1 2010
by G. Scott Shaw

RT @jcbackus: Virginia to entrepreneurs: Start your business here and pay no capital gains taxes! Check out my blog post on new VA law. http://ow.ly/1tIYc

April 1 2010
by Roger Yee

Virginia to Entrepreneurs: Start Your Business Here – And Pay No Capital Gains Tax! — http://bit.ly/cvXqpf #va #dc #dcfi #startups

April 1 2010
by Thanasis Delistathis

RT @jcbackus: Virginia to entrepreneurs: Start your business here and pay no capital gains taxes! Check out my blog post on new VA law. http://ow.ly/1tIYc

April 2 2010
by Derek Tomlinson

RT @rogery33: Virginia to Entrepreneurs: Start Your Business Here – And Pay No Capital Gains Tax! — http://bit.ly/cvXqpf #va #dc #dcfi #startups

April 2 2010
by Philippe Lavertu

Virginia to Entrepreneurs: Start Your Business Here – And Pay No Capital Gains Tax! – Blog | New Atlantic Ventures http://shar.es/m2Xg4

April 2 2010
by Formation Solutions

RT @plavertu: Virginia to Entrepreneurs: Start Your Business Here – And Pay No Capital Gains Tax! http://shar.es/m2Xg4

April 5 2010
by Tax Calculator

RT @formationsol: RT @plavertu: Virginia to Entrepreneurs: Start Your Business Here – And Pay No Capital Gains Tax! http://shar.es/m2Xg4

April 6 2010
by Jim Clifton

RT @formationsol: RT @plavertu: Virginia to Entrepreneurs: Start Your Business Here – And Pay No Capital Gains Tax! http://shar.es/m2Xg4

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