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Key Idea: Invest In A SCOR and Receive A Tax Advantage

An investment broker David Porter explains  how an investor in a SCOR get receive tax breaks over time.   More...

Key Question:


The latest revisions to the tax statutes have made investing in businesses, large and small, much more attractive. Congress provided this incentive to the investing public to spur economic growth.
Is an investment in your company appealing from a tax point of view?
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (Public Law 108-27) amended section 1(h) of the Internal Revenue Code to change the capital gains tax rates. Your investors gain on the investment in your company will be a capital gain because your stock is a capital asset. The maximum capital gains rate is 20%. Any loss, if it is incurred can be offset against the investors' capital gains and ordinary income to the extent of $3,000 per year. Losses are carried forward until utilized.

Think about it

Smart investors don't let the tax tail wag the economic dog but tax effects are certainly taken into account in the overall evaluation of the investment. As you put together the financial projections of your business, will you include the anticipated tax consequences?

Clip from: Small Corporate Offering Registration (SCOR)

Austin, Texas:  The Securities Exchange Commission (SEC) instrument known as Small Corporate Offering Registration (SCOR), sometimes referred to as Reg D Rule 504, is a little-known, but important tool for small businesses.

Mandated by Congress, every year since 1982 the SEC has held an annual meeting for small business investors and owners called "Small Business Capital Formation Conference."   The first result of that conference was the Reg D Rule 504.

In 1992, ten years later, Deborah Bortner, the Securities Administrator for the State of Washington, led the way to simplify the registration by developing the SCOR document.

At that time Congress wanted to help small business owner who have a difficult time finding money.  Another aspect of the SCOR is use it as a liquidity model that forces a business valuation. It could also be used as an exit strategy.  The majority of small business owners do not have a succession plan and a SCOR would necessitate that such a plan be implemented.

Historically, out of every $100 in banks loan, small business gets about $7. Though contributing over 50% of the Gross National Product,  working capital is often difficult to obtain.

The SCOR has not caught on. There is very little publicity about it and just a few educational resources. It does require three years of audited financials. It does involve your CPA and a good securities lawyer. 

The SCOR could be used in the following ways:  (1)  A cornerstone of a succession plan and liquidity model for mature small businesses, (2) An alternative to an employee-stock ownership program, (3) A means for all those who already want to buy into a business to do so without going through an IPO and without necessarily being a qualified investor, and (3) An instrument to provide a conservative diversification strategy for pension funds, mutual funds, and private investors.

Because of the ubiquity of the web, Small Business School will promote any and all attempts to develop  mechanisms so the best small businesses are indexed against one another and the best among the best rise to the top and are immediately qualified to be selected by any investor to receive equity capital.

It will change business in America forever.  Small business can share equity,  learn about liquidity models,  understand our financials and key critical ratios, and then participate in the market just like any big business.

Go to all the key ideas and videos of this episode...

Greater Austin Chamber of Commerce

David Porter, Senior VP/Economic Development

210 Barton Spring Road, Suite 400
Austin, Texas 78704 , TX 78704

Visit our web site:

Business Classification:

Year Founded: 100

Invest In A SCOR and Receive A Tax Advantage

HATTIE: Someone's invested in my company and now they're saying, `I want my money out. I'm going to go invest someplace else.' How do they get their money out?

DAVID: They don't. They do not get their money out by having the company pay them their money. They made an investment in a stock. The reason they made that investment in the stock is that they expected the value of that entire company to go up, and they expected that company's earnings to become worth more to other potential purchasers. Generally, it's up to that other individual investor to find some other investor to buy his stock from him.

HATTIE: OK, so this is the difference between a SCOR and Wall Street.


HATTIE: Wall Street exists with all these professionals buying and trading. That's the secondary market you're talking about.

DAVID: That's correct.

HATTIE: That's the access to these secondary markets for the big stocks or for regular stocks. DAVID: For large companies, right.

HATTIE: All right. But with a SCOR offering, the individual who bought into my business is going to hold onto those shares until they find someone to buy it from them.

DAVID: Well, there are several reasons that they want to do that, not the least of which is a tax reason. If you purchase most of these small corporate offerings, the majority will qualify under Section 1202 of the tax code, which means that if you hold them for five years or more, whenever you sell them, you get to exclude 50 percent of the capital gain from taxation.

HATTIE: Oh, my gosh.

DAVID: The other side...

HATTIE: So that's a good reason to buy a SCOR.

DAVID: That's one good reason to buy a SCOR. Another reason is, that the company may qualify under Sections 1244 or 1245, which say that if you sell that stock and make an equal investment in another qualified company, you at least defer that tax. You don't pay the tax on it right now. Additionally, you have the ability, if things really go badly for the company, that you may be able to write the entire investment off as a direct write-off against your taxes, rather than have to take it as a capital loss.

HATTIE: All right. So tell us why small business deserves our investment?

DAVID: Small business deserves your investment because it has the potential of making you more money with tax advantages that are not available in large companies.

In the Studio

Hattie: You can develop a SCOR document right on the Small Business School web site by answering the Interactive Questions. It is a good exercise and at the very least you'll have an excellent business plan. In the first ten years of business, we all generally focus on managing our debt. In the next years we should be in a position to focus on our equity and the many ways to leverage it as part of our succession strategy. Surely the SCOR document should be considered among all your options.

There is more on Steps 7 and 8 on our web site. I'll see you next time.

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