December 2, 2010

100 Percent Gain Exclusion for Qualified Small Business Stock (QSBS)

100 Percent Gain Exclusion for Qualified Small Business Stock (QSBS) Tax & Business

The Small Business Jobs Act of 2010 includes a provision allowing 100% gain exclusion for qualified small business stock (QSBS) acquired after September 27, 2010 and before January 1, 2011 and held for more than five years. The exclusion applies to regular tax and Alternative Minimum Tax (AMT) if certain requirements are met.

Prior to the Act, non-corporate taxpayers could exclude 50% (60% for empowerment zone businesses) of any gain on the sale or exchange of QSBS held for more than five years. With the passage of the Creating Small Business Jobs Act of 2010, the gain exclusion was increased to 75% for QSBS acquired after February 17, 2009 and before January 1, 2011. In either case, for regular income tax purposes, the portion of the gain includible in taxable income is taxed at a maximum rate of 28%. For AMT purposes, a percentage of the excluded gain was a preference item and included in income.

The requirements for stock to qualify as QSBS include, but are not limited to:

  • Stock in a domestic C corporation that is acquired by the taxpayer at its original issue (directly or through an underwriter) in exchange for money or other property (not including stock); or compensation for services provided to the corporation (other than services performed as an underwriter of such stock).
  • The aggregate gross assets of such corporation does not exceed $50 million any time before or immediately after the issuance of such stock.
  • At least 80% of the value of the assets of the corporation are used in the active conduct of one or more trade or businesses.
  • Corporation is not in the trade or business of
    1. performing services in professional services,
    2. banking and financial services,
    3. farming,
    4. mining and extraction, and
    5. hospitality services.
  • Eligible corporations do not include
    1. DISCs,
    2. corporations making an election under 936,
    3. regulated investment companies, REIT’s or REMIC’s, and
    4. cooperatives.

The amount of gain that can be excluded by each taxpayer is limited to $10 million or 10 times the original adjusted basis of such QSBS.

Although the benefits can’t be realized for another 5 years, if the circumstances make sense it could be a great tax benefit, however, there is limited time to take advantage of this provision.

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