A recent extension of the 100% gain exclusion for sales of qualified small business stock pursuant to Internal Revenue Code Section 1202 presents certain taxpayers with a significant tax planning opportunity in 2011.
Generally, Internal Revenue Code Section 1202 allows non-corporate taxpayers to exclude 50% of the gain on qualified small business stock in a C corporation. To qualify as small business stock, the stock must be issued by a C corporation that invests 80% of its assets in the active conduct of a “qualified trade or business.” Although many businesses will meet the “qualified trade or business” requirement, certain businesses, including those involved in banking, insurance, investing, farming and hospitality, are excluded. In addition, the corporation must have assets of $50,000,000 or less at the time the stock is issued. Qualified small business stock must be held by the taxpayer for at least five (5) years for the exclusion to apply.
The 50% exclusion available under 1202 was increased to 75% for stock acquired in 2009 and then increased to 100% for stock acquired during part of 2010. In December 2010, the 2010 Tax Relief Act extended the 100% exclusion to stock acquired after December 31, 2010 and before January 1, 2012. For stock acquired after January 1, 2012, the exclusion for gain on small business stock will revert to 50%.
The extent of the 1202 gain exclusion is limited. The maximum amount of gain eligible for the 1202 exclusion with respect to a particular corporation is the greater of (1) ten times the taxpayer’s basis in the stock; and (2) $10,000,000. For example, if a taxpayer’s basis in his qualified small business stock issued in 2011 is $500,000 and he sells the stock for $5,000,000 (after satisfying the 5 year holding period) he could exclude 100% of $4,500,000 the gain under Section 1202.
The potential exclusion of 100% of federal capital gain on the sale of qualified small business stock presents a significant tax planning opportunity through 2011. For more information or to schedule a consultation to explore the benefits of this exclusion, please contact Troy Kingshaven at (831) 373-1241.
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