New Tax Act Extends 100% Tax Exclusion For 1 Year

Earlier this year Congress passed, and the President signed an act which provided a 100% exclusion from tax, including the alternative minimum tax, for gain on the sale of qualified small business stock held for more than 5 years. That benefit was set to expire at the end of this year.

However, now Congress and the President have extended this benefit to investments in qualified small business stock through the end of next year, 2011.

See Section 760 of the bill.

This is a welcome development for founders and investors in companies that qualify as qualified small businesses. Generally, these are:

  • C corporations
  • with less than $50M in gross assets
  • actively engaged
  • in a qualified trade or business (generally, not service businesses)

If you have any questions as to whether your venture could qualify for this benefit, do not hesitate to call Joe Wallin at 206 757 8184.

You can find Section 1202 of the Internal Revenue Code here.

From the summary of the bill:

Exclusion of small business capital gains. Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. The provision extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012 and held for more than five years.

For more information, see here.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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