UPDATE: The fiscal cliff bill renewed the 100% exclusion (subject to the generous cap) under Section 1202 for investments made from September 27, 2010 through the end of calendar year 2013. See here: http://www.startuplawblog.com/2013/01/01/fiscal-cliff-bill-would-renew-100-exlusion-for-qsb-stock-investments/
By Dan Wright
Noncorporate investors who sold or plan to sell QSBS in 2011 and are expecting a large tax windfall under Section 1202 of the I.R.C. (“Section 1202”) will likely be disappointed. In general, the tax break under Section 1202 for gain realized by a noncorporate investor on the sale or exchange of QSBS in 2011, which is held by such investor as a capital asset and for a period of over 5 years, is about 1%. So why are people making such a big deal about Section 1202 as this year comes to a close?
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If you didn’t pay alternative minimum tax on your incentive stock option exercises prior to January 1, 2008, and you owe the IRS a bunch of money–don’t worry about it.
The Internal Revenue Code now provides that any “underpayment of tax outstanding on the date of the enactment of this subsection which is attributable to the application of section 56(b)(3) for any taxable year ending before January 1, 2008, and any interest or penalty with respect to such underpayment which is outstanding on such date of enactment, is hereby abated.”
Section 56(b)(3) is the provision which provides that the gain on the exercise of incentive stock options is an alternative minimum tax adjustment. So, the Code now says, quite literally, that if you owe taxes attributable to the exercise of incentive stock options for a tax year ending before January 1, 2008, and interest and penalties on such taxes, you don’t have to worry about it!
Taxpayers should be aware that the provision is only effective for ISO exercises prior to January 1, 2008, and does not extend into the future.
For more information, see: