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Qualified Small Business Stock Remains Eligible For 100 Percent Gain Exclusion

Published April 22, 2011

A tax incentive associated with qualified small business stock (QSBS) was extended for 12 more months as stipulated in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed by President Barack Obama into law on Dec. 17.

The act contains a temporary exclusion for 100 percent of the gain accepted by non-corporate investors from the sale of qualified small business stock that was acquired after Sept. 27, 2010 and before Jan. 1, 2011 for QSBS held for beyond five years.

Previous policy provided only a 50 percent exclusion (or 75 percent for QSBS purchased before the enactment of the act in 2009 or 2010) and treats a portion of the excluded gain as a preference item for the alternative minimum tax.  This exclusion, however, applies for both the federal income tax and the alternative minimum tax, potentially decreasing the federal income tax on qualifying gains to zero.

The cumulative amount of gain that a taxpayer may exclude as related to an investment in a single issuer is usually restricted to $10 million or 10 times the investor’s total tax basis in the issuer’s QSBS, whichever is greater.

The investor must not be a corporation.  The investor is required to have secured the stock at original issuance for money or non-stock property, and must hold it for more than five years.

The issuer must meet the requirements for a qualified small business at the time the QSBS is issued – meaning the issuer is a U.S.-based C corporation with gross assets of $50 million or less, and must have maintained gross assets of $50 million or less since Aug. 10, 1993.  The corporation must use more than 80 percent of its total assets actively conducting a business or trade during the time the stock is held.

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