Accounting for angel investors can be a challenge because IRS tax codes are complex and in a constant state of flux. The IRS tax codes include provisions that directly impact tax planning for angel investors, so it is important for US-based angel investors to have this information in mind. It may result in significant tax savings. However, there are some tax rules that could cost you money if you are an angel investor and you do not understand the rules and regulations.
What Role Does IRS Tax Code Section 1202 Play in Angel Investment Accounting?
There may be some benefits you are overlooking as a US angel investor investing in early-stage companies. If you are not considering section 1202 of the IRS tax code, you may want to partner with a CPA experienced in angel investment tax planning to understand the full scope of tax implications.
This tax provision provides a possible allowance of 100 percent exclusion of your capital gains off of your US federal taxes. A stipulation is that you hold onto your stock for at least five years before you sell it. For example, an experienced angel investor CPA should be able to calculate your capital gains exclusion as follows:
- Acquired after September 28, 2010 -100 percent exclusion
- Acquired between February 18, 2009, and December 27, 2010 - 75 percent exclusion
- Acquired between August 10, 1993, and February 17, 2009 - 50 percent exclusion
Frequently Asked Questions: Angel Investor Tax Planning And Tax Credits
1. Do All Stocks Qualify for Exclusion under Section 1202?
Section 1202 traditionally only applies to startup or small business stocks.
2. Is There a Maximum Exclusion for Section 1202?
The maximum exclusion is 10 times the initial investment, or $10 million.
3. Does the Alternative Minimum Tax Apply?
No. The alternative minimum tax is not applicable to section 1202.
4. Are Any Industries Excluded?
Yes. Under section 1202, angel investors cannot exclude capital gains for startups in real estate, service, mining, finance, extraction, farming, hospitality, and restaurant industries. The exclusion also includes corporations that make investments.
Basic Angel Investment Bookkeeping Guidelines
As an angel investor, bookkeeping may help you to figure out if your business or investments are profitable. Monitoring numbers may help you to identify financial challenges early on and fix them before they become a crisis that impacts you and those you have invested in.
Decades ago, accountants kept records in a physical book called a general ledger. Today, most bookkeeping for angle investing is done using high-tech software to record accounts. The digital file is your general ledger.
Three primary methods for creating a GL are:
- Spreadsheets, such as Excel or Google Sheets
- Desktop bookkeeping/accounting software, like QuickBooks Desktop
- Cloud-based bookkeeping software, like QuickBooks Online
The spreadsheet software may be the cheapest option since programs like Google Sheets are free. However, our angel investing financial advisers, generally recommend avoiding managing and creating your own general ledger in a spreadsheet. It may be a recipe for disaster. It’s usually preferable to use cloud-based bookkeeping software.
Deciding on a Bookkeeping Method
Single-entry bookkeeping encompasses recording each transaction one time. If a customer pays, that sum is recorded in your assets column. This could be great for simple businesses, but it likely won’t work for angel investors.
The double-entry bookkeeping system is recording two entries for each transaction. You record debit and credit. The debit is usually recorded on the left and the credit on the right. Double-entry bookkeeping could be more challenging than single-entry bookkeeping, but it probably will ensure that your books are balanced.
Angel Investor Financial Guidance
At Fusion CPA, our financial advisers are ready to work with you to coordinate the preparation and review of income tax returns and federal tax returns and help with other tax preparation and consulting services as necessary. Our experienced team of angel investment financial advisers is ready to assist to help you take advantage of tax planning strategies, asset placement, and specialized deduction identification.
Our bookkeeping services are performed by seasoned accountants who have the shared goal of adding value to your company by documenting items accurately the first time. We are committed to helping angel investors find more time for business ventures, grow their profits, and assist in the short and long term tax planning. So, if you are interested in learning how recent changes in the tax law affect angel investing ventures or your noticing inefficiencies in your accounting and bookkeeping processes, we are here to help. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today! You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.