Capital Gains Exclusion on Qualified Small Business Stock Offers Attractive Tax Benefits

Capital Gains Exclusion on Qualified Small Business Stock Offers Attractive Tax Benefits
June 06 11:33 2016 Print This Article

The Protecting Americans from Tax Hikes Act of 2015 (PATH), signed into law by President Obama on December 18, 2015, provides a number of tax benefits to various types of businesses. One of these is the permanent extension of the Qualified Small Business Stock Gains Exclusion under Section 1202. This very attractive tax incentive offers up to 100% capital gains exclusion on the sale or exchange of certain qualified small business stock (QSBS) acquired after September 27, 2010.

What is Section 1202?

Section 1202 has been part of the tax code since 1993. However, it did not offer a significant tax benefit on capital gains until the exclusion rate was increased to 100% in 2010. The recent PATH legislation making the 100% capital gains exclusion permanent has consequently made the provision much more attractive. Section 1202 encourages investment in new ventures and small businesses by granting tax relief to investors who acquire, and then sell, stock in these businesses.

Which Businesses Can Take Advantage of Section 1202?

The rules in determining eligibility for the Section 1202 small business stock gains exclusion are somewhat complex and the requirements are fairly stringent, the most significant of which are:

  • The QSBS must be from a C Corporation.
  • The taxpayer must be a non-corporate taxpayer.
  • The QSBS must be held for more than five years to qualify for the 100% exclusion.
  • The stock must have been acquired by the taxpayer at original issue, either directly or through an underwriter, in exchange for money or property (not including stock), or as pay for services provide to the corporation (other than services performed as an underwriter of the stock).
  • The C Corporation must have total gross assets of $50 million or less at all times after August 9, 1993 and immediately after it issues the stock.

Conclusion
The permanent extension of the 100% capital gain exclusion for QSBS presents a unique tax planning opportunity for founders and shareholders of early stage companies.  However, each situation is different so be sure to discuss Section 1202 with your tax advisor before taking any action.

For more information, please contact Asael Meir, Partner, CohnReznick, at asael.meir@cohnreznick.com or 516-336-5515.


cohnreznickmeirAsael Meir is a partner in CohnReznick’s Long Island office and leads the Firm’s Technology and Life Sciences Industry Practice in the Firm’s New York offices. With more than 15 years of experience in providing assurance and financial reporting services, Asael serves technology, hospitality, and retail and consumer products companies. He works closely with business owners and management teams of both privately held and publicly listed companies who are seeking guidance on acquisitions, divestitures, and capital formation transactions. 

Prior to joining CohnReznick, Asael worked in the Middle East, Asia, Europe, and the United States, enabling him to offer unique and global business insight to his clients. His private industry experience includes multiple international consulting assignments, and a management position for a start-up telecommunications company, where he re-engineered finance operations to establish companywide internal controls over financial reporting.

 

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