Photographer: Victor J. Blue/Bloomberg

Startup Workers Would Get Tax Relief on Paper Wealth Under GOP Plan

  • Bill is expected to include tax deferral for stock options
  • VCs cheer carried interest, R&D and small business policies

Startups lure talent with the potential for future riches, but many workers later find they can’t afford the tax payment associated with acquiring their stock options. U.S. House Republicans are expected to offer a solution in their tax bill, along with other incentives for private companies and venture capitalists.

A version of the legislation in the works will contain a provision for delaying tax obligations on stock options in closely held companies, said Justin Field, vice president of government affairs at the National Venture Capital Association, an industry trade group. Although it wasn’t in the bill published Thursday, House Majority Leader Kevin McCarthy touted the plan in an editorial for the Financial Times, saying it would extend the period before shareholders must pay taxes on unrealized stock gains.

“A median-income employee is unlikely to be able to afford the taxes on stock gains from a growing company, so they walk away from being equity owners for fear of the taxman,” McCarthy wrote. “This will allow companies to hire and retain the best employees possible by giving them the opportunity to be owners as well.”

The stock option proposal is one of the few aspects of the Republican tax plan eliciting cheers from Silicon Valley. Among the larger points of contention, the bill would impose a 12 percent rate on overseas earnings, which would disproportionately affect global technology companies like Apple Inc. and Microsoft Corp. Big university endowments, which are major backers of venture capital and other asset classes, face a 1.4 percent tax on investment income. The bill also offers an array of benefits for companies and the wealthy, which are unpopular in the left-leaning tech industry.

But the legislation includes several policies that Republicans say are designed to rejuvenate American entrepreneurship. Companies would receive tax breaks for research and development expenses, and new rules would reward investors in small businesses valued at less than $50 million. Despite campaign promises by President Donald Trump, the bill maintains current rules for carried interest, a key element of compensation for venture capitalists and other fund managers.

Field, of the VC trade association, expressed cautious optimism for the survival of carried interest. He refrained from giving a full-throated endorsement of the bill because it’s likely to undergo changes. “We remain vigilant,” he said.

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