Fiscal Cliff Bill Would Renew 100% Exclusion for QSB Stock Investments

QSB CliffThe fiscal cliff bill has a surprise few expected. It would renew through the end of 2013 the 100% exclusion from tax gain on qualified small business stock held for at least 5 years (there is a cap on the exclusion, but it is a substantial one).

This tax benefit, which expired at the end of 2011, would be extended for investments made through the end of calendar year 2013. Section 324 of the fiscal cliff bill states as follows:

SEC. 324. EXTENSION OF TEMPORARY EXCLUSION OF 100 PERCENT OF GAIN ON CERTAIN SMALL BUSINESS STOCK.

(a) IN GENERAL.—Paragraph (4) of section 1202(a) is amended—

(1) by striking ‘‘January 1, 2012’’ and inserting ‘‘January 1, 2014’’, and

(2) by striking ‘‘AND 2011’’ and inserting ‘‘, 2011, 2012, AND 2013’’ in the heading thereof.

****

Paragraph (4) currently reads as follows:

(4) 100 percent exclusion for stock acquired during certain periods in 2010 and 2011

In the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010 and before January 1, 2012—

(A) paragraph (1) shall be applied by substituting “100 percent” for “50 percent”,

(B) paragraph (2) shall not apply, and

(C) paragraph (7) of section 57 (a) shall not apply.

****

Therefore, as amended, Paragraph (4) will read as follows:

(4) 100 percent exclusion for stock acquired during certain periods in 2010, 2011, 2012, and 2013

In the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010 and before January 1, 2014—

(A) paragraph (1) shall be applied by substituting “100 percent” for “50 percent”,

(B) paragraph (2) shall not apply, and

(C) paragraph (7) of section 57 (a) shall not apply.

****

There were also technical amendments included. I’ve quoted them below.

(b) TECHNICAL AMENDMENTS.—

 (1) SPECIAL RULE FOR 2009 AND CERTAIN PERIOD IN 2010.—Paragraph (3) of section 1202(a) is amended by adding at the end the following new flush sentence:

‘‘In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for purposes of this subsection shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223.’’.

(2) 100 PERCENT EXCLUSION.—Paragraph (4) of section 1202(a) is amended by adding at the end the following new flush sentence:

‘‘In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for purposes of this subsection shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223.’’.

(c) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by subsection (a) shall apply to stock acquired after December 31, 2011.

(2) SUBSECTION (b)(1).—The amendment

made by subsection (b)(1) shall take effect as if included in section 1241(a) of division B of the American Recovery and Reinvestment Act of 2009.

(3) SUBSECTION (b)(2).—The amendment made by subsection (b)(2) shall take effect as if included in section 2011(a) of the Creating Small Business Jobs Act of 2010.

Send to Kindle

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.
This entry was posted in Federal Law & Regulation, Financings, Startup Law, Startups, Taxes. Bookmark the permalink.
  • http://twitter.com/RGseattle Rob

    Joe, can you give us the plain english version? 100% exclusion from cap gains tax applies to small business stock acquired during 2011, 2012, 2013 and held for at least 5 years?

    • joewallin

      Sure, the gist of it is this: if you are a non-corporate taxpayer, and if you invest in qualified small business stock before the end of the year, and you hold that stock for at least 5 years, on sale you won’t have to pay tax on the first $10M of your gain. (This is the general rule–but you should of course always consult with your tax advisors with respect to particular investments and with respect to your particular circumstances.)

  • http://twitter.com/stevebrotman Steve Brotman

    Did this go into effect? I haven’t read anything anywhere about it other than here. Also, I understand there is a 50% exclusion retroactive on cap gains on small qualified business gains, as long as the investment was held 5 years. Is that right?

    • http://startuplawblog.com/joewallin Joe Wallin

      The law went into effect. The 100% exclusion applies to investments made between 9/27/2010 through the end of this year.

  • Pingback: Fiscal Cliff Bill to Renew 100% QSBS Tax Break | The Venture Alley