Friday, December 09, 2011

Senate Legislation Would Provide Tax Incentives and Open the Door to Sarbanes-Oxley Reform for Small Companies

Senators Jerry Moran (R-Kan.) and Mark Warner (D-Va.) have introduced bipartisan legislation aimed at jumpstarting the economy through the creation and growth of new businesses and assisting small companies. The Startup Act, S 1965, outlines a multi-pronged approach consisting of tax incentives, Sarbanes-Oxley reforms, and reform of the regulatory process.

The legislation would require an extensive cost-benefit analysis of all proposed major regulations and expands that analysis requirement to independent regulatory agencies, such as the SEC and CFTC. The required analysis will, to the extent possible, quantify the benefits of the rule, and the anticipated costs of administration, compliance, and reduced efficiency. The measure would also require federal agencies to examine the purpose of proposing additional regulation and provide an analysis of alternatives to the rule that would accomplish the same goal. Further, agencies would have to consider the effect of new major regulations on startups.

The legislation would pave the way for Sarbanes-Oxley Act reform by amending an existing project underway at GAO regarding compliance costs with the Act by requiring the GAO to study the effects of making compliance with Section 404(b) of Sarbanes-Oxley voluntary for small issuers. Section 404(b) requites auditors to provide an attestation on management’s report on the effectiveness of internal controls. The GAO would be required to study the possible effects of such a reform on prospective investors, shareholders, and the markets.

S 1965 would also make permanent the 100 percent exemption on capital gains taxes for investments held for at least five years in qualified small businesses, which are defined as having less than $50 million in total assets. It would also establish a federal income tax credit for qualified small businesses, allowing them to claim the tax credit for 100 percent of taxable profits in the first year of profit and 50 percent of profits in the two succeeding taxable years, and zero percent thereafter. The amount of income eligible for the tax credit is capped at $5 million in each of the three years.