“Among the taxpayer-favorable aspects of the American Taxpayer Relief Act of 2012, the 100 percent exclusion from gross income of gain on the sale of Qualified Small Business Stock (QSBS), provided for in section 1202 of the Internal Revenue Code, was extended for an additional year. Therefore, gain from the sale of QSBS purchased during the period between September 2010 and December 31, 2013 will not be subjected to tax, provided certain requirements are met.” (Baker Donelson)
Tucked away in the American Taxpayer Relief Act is a provision that should help small businesses attract additional investment in 2013.
The extension of a 100% tax exclusion on income resulting from the sale of Qualified Small Business Stock means that taxpayers who purchase certain stock have an additional year to benefit from the break. Equally important, it gives small business owners an additional year to attract investors interested in minimizing their tax liability.
For your reference, three key elements of the tax exclusion:
1. The stock must meet specific qualifications:
“The corporation issuing the stock must be a ‘Qualified Small Business,’ which among other requirements means the corporation is a C corporation, has no more than $50 million in gross assets prior to the issuance of such QSBS, and employs at least 80 percent of its assets (measured by value) in the active conduct of one or more trades or businesses, but generally excluding service businesses.” (Baker Donelson)
2. There are limits on the exemption:
“The amount of gain that is eligible for exclusion under this provision is equal to the greater of (i) 10 times the taxpayer’s basis in the stock or (ii) $10 million. Gain is eligible for exclusion only if it is derived by an individual, directly or indirectly, through an entity treated as a partnership for tax purposes… Gain above the applicable threshold amount is subject to capital gains tax and is generally subject to the 3.8% Medicare tax that applies to capital gains from the sales of stock beginning in 2013.” (Morgan Lewis)
3. Stock must be held for five years to qualify:
“Redemptions by the corporation from the taxpayer or a related person within the four-year period starting two years before the taxpayer’s or related person’s acquisition of the QSBS will disqualify the stock. Thus, the non-redemption period begins two years before and ends two years after the issuance of the stock to the taxpayer or related person. This is to encourage long-term investment.” (Pepper Hamilton)
- Congress Extends Exclusion for Investors in Qualified Small Businesses – Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
- Congress Extends 100% Gain Exclusion for Small Business Stock – Morgan Lewis
- American Taxpayer Relief Act Of 2012 Extends Temporarily Full Exclusion From Gross Income Of Gain From Qualified Small Business Stock To Encourage Investment – Pepper Hamilton LLP
- FTB issues Notice to Retroactively Deny “Qualified Small Business Stock” Tax Benefits. Amended Returns Should be Filed – Sheppard Mullin Richter & Hampton LLP
- FTB Retroactively Denies “Qualified Small Business Stock” Personal Income Tax Benefits – Manatt, Phelps & Phillips, LLP
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