Investing in a business is one of the major forms of investing for institutions and individuals alike. As businesses grow and branch out, their investors earn money based on the value of their partial ownership or according to the terms of an investment agreement. Besides opportunity for growth, investors can also receive tax benefits by choosing to put their money into businesses that fuel the economy.
If you itemize your tax deductions, you can claim deductions for miscellaneous expenses related to your investments in businesses. For example, if you invest in a business by purchasing stock, you can deduct the cost of storing your stock certificates in a safe deposit box, the cost of transportation to and from your broker to sign documents, the cost of computers and software you use to manage your investments and the money you spend on research and advice to make and manage your stock investments. To comply with the tax code you can only deduct the portion of these expenses that exceeds 2 percent of your adjusted gross income. The interest you pay to borrow money that you use to invest in a business is also deductible if the investment you make is taxable, as is the case with buying stock.
The American Recovery and Reinvestment Act of 2009 allows investors who put money into small businesses to exclude a large portion of their profits from taxes. This provision only applies to small businesses that offer Qualified Small Business Stock, which requires special certification. However, investors who buy this stock and hold it for at least five years can exclude up to 75 percent of their sale price from investment income taxes. This reduces the taxes associated with investing in small businesses and also encourages investors to ride out short-term fluctuations in a business's performance.
Any amount of investment in a business of any size represents a risk. If the business loses value, you'll realize a loss when you sell your investment for less than you paid for it. However, this can also have tax benefits that help offset the losses involved in business investing. Capital losses, which refer to money you lose on investments such as business stocks, first reduce your taxable capital gains from investments you sell for profit. Capital losses can also reduce your taxable income from other sources by up to $3,000. For example, if you make $50,000 at work and lose $3,000 in the stock market by selling shares of a failing business that you purchased many years ago, you will only pay taxes on $47,000 of your work income.
Some investments in businesses offer tax benefits indirectly. This is the case with investment plans that spread their risk over many different investments, including business investments, and allow participants to defer taxes by contributing pretax income to the plan. For example, a 401k retirement plan allows workers to set aside money from each paycheck. The plan manager invests some of that money in businesses, and the worker only pays taxes on the income after withdrawing it during retirement. A similar type of investment is a 529 college savings plan, which also defers tax and invests in businesses.