Federal Legislation Would Set Up Tax-Free Savings Accounts for Entrepreneurs
Bills making their way through Congress would enable American entrepreneurs to sock away thousands of dollars a year tax-free to help bankroll business startups.
In the U.S. Senate, the proposed Small Business Savings Account Act would let an entrepreneur stash up to $10,000 a year in a tax-free account like an IRA. Once an entrepreneur decided to start a small business, the money could be withdrawn to pay for equipment, office space, marketing, legal fees and other major expenses.
Money that was not used for startup expenses or was withdrawn for other expenditures would lose its tax-free status.
“Startup costs often stand in the way between a good idea and a profitable business venture,” said U.S. Sen. Mark Pryor, D-Ark., the main sponsor of the bill. Pryor said the measure would provide “a bridge – allowing entrepreneurs to save enough seed money to get their business off the ground.”
Co-sponsors of the Senate bill (SB 364) are Sens. Herb Kohl, D-Wis., and Scott Brown, R-Mass.
Pryor pointed out that many would-be business owners are turning to retirement savings and credit cards to generate startup capital. The average first-year cost to run a small business is $80,000, he said.
“More and more, aspiring business owners are gambling with their retirement or credit in order to raise enough seed money. Tax-free savings accounts provide a safer alternative,” Pryor said.
U.S. Rep. Cory Gardner, R-Colo., has introduced a similar bill in the U.S. House – the Small Business Startup Savings Accounts Act (HR 1180). Co-sponsors are U.S. Reps. Ron Paul, R-Texas; Mike Coffman, R-Colo.; Stevan Pearce, R-N.M.; and Joseph Pitts, R-Pa.
Like the Senate bill, the House bill would let an entrepreneur with an idea for a startup set up one of these savings accounts. But the House measure would go a step further by allowing a business with up to 500 employees to start a tax-free account.
“Many small businesses are started in a garage with a dream and a credit card, and it’s time to lend these people a hand,” Gardner said. “If we’re serious about economic recovery and job creation, then let’s look to ways that we can help small businesses, which create two out of every three new jobs.”
In the House and Senate bills, contributions to an account would be capped at $10,000 a year; the total value of these accounts would be limited to $150,000. The caps placed on an account are aggregate values, so someone couldn’t skirt the rules through ownership of several accounts, according to Gardner.
Age and income restrictions would not apply to holders of the tax-free accounts.