What Angel Investors Should Know About Tax Planning & Bookkeeping

Atlanta Angel Investment Accountants

An angel investor can be a single person or group of people who partner with a business in its early stages, by investing in it, in exchange for a share of the business. Accounting for angel investors may result in significant tax savings through angel investor tax credits, but accurate accounting for angel investments can be a challenge because IRS tax codes for this are complex and often changing.

How Section 1202 of the IRS Tax Code Affects Accounting For Angel Investors

There may be some benefits you may be overlooking as a US angel investor if you are not considering Section 1202 of the IRS tax code. It is advisable to partner with a CPA experienced in angel investment tax planning to help you understand the full scope of tax implications under the Section 1202 Code, as this tax provision might allow for 100 percent exclusion of your capital gains off of your US federal taxes. One of the stipulations under this code is that investors hold onto their stock for at least five years before selling it but ultimately stand to gain the benefit from full-on tax exemption on capital gains.

Here are the answers to some of the common questions relating to Section 1202 that might enlighted angel investors:

  1. Do All Stocks Qualify for Exclusion under Section 1202?

Section 1202 traditionally only applies to startup or small business stocks.

  • Is There a Maximum Exclusion for Section 1202?

The maximum exclusion is 10 times the initial investment, or $10 million.

  • Does the Alternative Minimum Tax Apply?

No. The alternative minimum tax is not applicable to section 1202.

  • 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. Angel Investor tax credit rules can be further studied here.

Angel Investment Tax Credit 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.

Bookkeeping for angel investors can easily be done by using accounting software like QuickBooks to track and manage your income and expenses related to your angel investment. Getting the help of an experienced CPA that understands the ever-changing IRS tax codes for angel investors, is highly recommended to assist individuals who want to maximize tax exclusions under the 1202 code.

Software setup is imperative when it comes to adequate recordkeeping for tax purposes and deciding on a bookkeeping method when handling your accounting is crucial for this.

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 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!

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.

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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.