How a Tax Loophole Is Helping Silicon Valley Workers Save Millions


Olde Hornet

Well-Known Member
Wealth Matters

When Kay Luo joined LinkedIn in 2006, she received a grant of shares with a value of 12 cents each. The company went public in 2011 at $45 a share. By the end of the first day of trading, the price had doubled, and she began the process of selling her stock.
“It was more money than I’ve ever known,” said Ms. Luo, who is in her 40s and has retired from the tech industry. “I felt very unsophisticated to manage the wealth. I thought the right thing to do was hire a fancy accountant.”
Her new accountant helped with common techniques to minimize her tax on the windfall, like trusts, gifts and philanthropy. But she said he missed what has become one of the great windfalls in Silicon Valley: a provision in the tax code that allows employees at small companies to receive tens of millions of dollars in stock gains tax-free.
Ms. Luo said she was shocked that her accountant had failed to tell her about this: “It was hundreds of thousands of dollars we overpaid,” she said.
The tax code provision addresses what’s called qualified small-business stock. It says that people who are invested in a company with assets valued under $50 million are eligible to exclude from their taxes $10 million or 10 times their investment, whichever is higher. It can be used by employees at start-ups who are given stock as part of their compensation plans.
“This is just an incredible way to exclude a large amount of income,” said Raymond L. Thornson, managing director at the accounting firm Andersen Tax in San Francisco. “What makes this unique is most of the opportunities to save on taxes are to give money away or deduct your mortgage.”
 
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