Tax Planning that Literally Can't Wait: Qualified Small Business Stock by Karla Hopkins

One of the provisions of the Small Business Jobs Act is the 100% exclusion from gross income of capital gains from the sale of certain qualified small business stock (QSBS). Generally this provision will allow taxpayers to pay no federal tax on up to $10 million in gain from the sale of certain QSBS. To qualify the stock has to be acquired after September 27, 2010, and before January 1, 2012. Taxpayers in general will be able to exclude up to $10 million in gain from gross income with no preference for AMT purposes. To be eligible for the exclusion, the taxpayer must hold the QSBS for more than five years. Thus, the earliest one can benefit from the 100% exclusion would be 2015.
How does stock qualify for the Exclusion?
For QSBS to qualify for the 100% exclusion, the following provisions must be met:
• The QSBS must be acquired after September 27, 2010, and before January 1, 2012.
• The QSBS must be held for more than five years
• The exclusion applies only to non-corporate taxpayers, including individuals and pass-through entities such as partnerships and S corporations
• The small business must be a domestic C corporation, and the stock purchased must be purchased by the investor upon original issuance from the corporation.
• The small business corporation generally must use 80% of its assets (by value) in a qualifying active business (which excludes certain types of businesses, such as financial institutions, farms, professional service firms, hotels and restaurants, and similar businesses) for substantially all of the investor’s holding period.
• Additional provisions relating to assets and active business activities exist to complicate the applicability of this provision but should be reviewed at the time of a sale of such stock

If the benefits of this provision are not available until 2015, why are we talking about it now? Since there is a specific time frame for when the stock is purchased and how long it is held, 2011 is a key year to purchase shares that would be eligible for this provision. The exclusion is designed for those who bear the entrepreneurial risk of a new company. Individuals or pass-through entities wanting to start up a new company or invest in new companies should consider taking advantage of the new 100% exclusion and acquire newly issued QSBS prior to the end of 2011. Employees or directors holding stock options in qualified small businesses should consider exercising the options before the end of the year as well.