House Tax Bill Hits VCs

The legislation doubles the tax bite for venture capitalists, but extends a research & development credit.

The technology sector won one and lost one Nov. 9 as the U.S. House voted to strip away venture capitalists capital gains tax status, but extended the research and development tax credit for one year.

Approved on a 216-193 vote, the Temporary Tax Relief Act of 2007 (H.R. 3996) would more than double the tax rate on carried interest, a term referring to the profit that venture capitalists earn through the successful investment in companies. Eight Democrats crossed the aisle to join 185 Republicans opposing the bill.

Venture capitalists currently pay a capital gains rate of 15 percent on carried interest. Under the bill, venture capitalists profits would be treated as ordinary income, usually 35 percent for high-income earners. The legislation would also require hedge fund managers to pay tax on income they defer in offshore accounts.

The aim of the legislation is to keep middle class Americans from paying an AMT (alternative minimum tax). The bill would exempt for next year the first $44,350 of a single persons income from the levy and the first $66,250 of a married couples income. To offset the $51 billion the bill would cost, Democrats turned to venture capitalists and hedge fund managers.

The bill now moves to the Senate, where Republican opposition is expected to be fierce. The White House said Nov. 7 President Bush would veto any legislation that raises taxes.

During the House floor debate, Democrats argued that the bill would spare some 23 million Americans from being hit with the AMT while the tax increase to venture capitalists and hedge fund managers would affect only about 5,000 taxpayers.

"Fairness dictates this is not a tax increase, this is a closing of a loophole and you should be proud to participate in that," said House Ways and Means Committee Chairman Charles Rangel. "Who in the world would believe that its fair for corporations and partnerships to be doing the same work ... except one pays 15 percent because they have created in their imagination that their work is really capital when they take no risk, and the others get 35 percent."

The NVCA (National Venture Capital Association), which, along with other lobbyists opposing the bill, spent more than $6 million fighting it, was quick to condemn the House vote.


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"For some time, the NVCA has outlined the issues associated with more than doubling the tax burden on an industry that has helped to create more than 10 million jobs," Mark Heesen, president of the NVCA, said in a statement.

"As this issue moves forward, we hope that the Senate will review the merits of the VC community and determine that the measurable, long-term economic impact of the venture capital industry is too important to risk."

In an Oct. 29 letter to lawmakers, the NVCA said venture capitalists funded companies in 2006 that created 10 million jobs. The total revenue of those companies accounted for nearly 18 percent of the U.S. gross domestic product.

"We believe that increasing taxes on venture capitalists will hurt the entrepreneurial community," the letter states. "It will especially affect early-stage companies that represent the highest investment risk but that also create the most jobs and opportunities for the American economy."

The R&D tax credit extension is part of a package of 13 tax breaks for individuals and 18 for businesses included in the bill.


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