Qualified Small-Business Stock
A special tax break is designed to help qualifying small C corporations
raise capital by allowing long-term noncorporate investors in original
issue stock to cut the tax on their profit. The investor must hold
the stock for at least five years to take advantage of this exclusion
of gain on the sale. Moreover, the amount of the gain varies depending
upon when the stock was acquired.
Date Stock Acquired |
Rate on Gain NOT Excluded from Income |
Percentage of Gain Excluded from Gross Income |
After 12/31/2014 |
28% |
50% |
After 9/27/2010 but before 1/1/2015 |
N/A |
100% |
After 2/17/2009 but before 9/28/2010 |
28% |
75% |
After 8/10/1993 but before 2/18/2009 |
|
50% |
In order to qualify for this special break, taxpayers
must jump through a large number of hoops. But the amount of tax saved--especially
for higher-income taxpayer and those who face the new 3.8 Medicare tax
on net investment income can be significant.
The capital gains
exclusion applies only to gain on eligible stock (1) originally issued
by a qualifying corporation after August 10, 1993, and (2) held for
more than five years. The highlights of this break follow:
- The stock must be acquired in an exchange for money or other property
(other than stock), or as compensation for services provided to the
corporation (other than acting as the stock's underwriter).
- The small business must be a regular C corporation; it must have
$50 million or less in aggregate capital as of the date of stock issuance;
and at least 80 percent by value of corporate assets must be used
in the active conduct of one or more trades or businesses.
- The corporation cannot be involved in the performance of personal
services (such as health or law) or in the finance, banking, leasing,
real estate, farming, mineral extraction, or hospitality industries.
A number of other types of businesses, such as mutual funds and REITs,
are also disqualified.
- The exclusion for each eligible corporation applies only to the
extent that the gain does not exceed the greater of (1) 10 times the
taxpayer's adjusted basis in the stock disposed of during the tax
year (post-issuance additions to basis are disregarded), or (2) $10
million ($5 million for marrieds filing separately), reduced by gain
excluded in earlier years from sales of stock in the corporation.
- Although a post-issuance purchaser of otherwise qualified stock
doesn't get the exclusion, the tax break is preserved for those who
receive such stock as a gift or due to the death of the original purchaser.
The transferor's holding period also carries over to the transferee.
Similar rules apply to qualified stock distributed by a partnership
to its partners.
- Individuals can roll over, tax-free, gain realized on the sale
or exchange of qualified small business stock provided that the proceeds
are used to purchase other qualified small business stock within 60
days of the sale.
If
a sale of stock qualifies for the exclusion, the remaining gain is
not eligible for the regular long-term capital gains rate that applies
to assets held for more than 12 months. Such gain is taxed at a maximum
rate of 28 percent. However, if the exclusion does not apply because
the stock is sold prior to the expiration of the required five-year
holding period, the entire gain qualifies for taxation at the regular
capital gains rate.
|
Tip Beginning in 2013, a new 3.8 percent net investment
income tax may be imposed on individuals whose modified adjusted gross
income exceeds $250,000 for joint filers, $125,000 for married taxpayers
filing separately, and $200,000 for others. Trusts and estates with
income over a certain amount are also subject to the NII tax. Form
8960, Net Investment Income Tax - Individuals, Estates, and Trusts
is attached to the tax return. For 2013, the IRS has provided taxpayers
the ability to rely on more than one set of net investment income
tax rules. The best choice varies by taxpayers and depends on the
taxpayer's unique situation. Consult your advisor to determine which
approach would be best for you. |
|
© 2024 Wolters Kluwer. All Rights Reserved.