100% Exclusion of Gain on Certain Small Business Stock Extended in New Tax Act

Among the tax breaks extended by the 2010 Tax Relief Act, the temporary exclusion of 100% of gain on certain small business stock can be extremely beneficial, given the right set of facts. For 2010, a taxpayer may exclude all of the gain on the disposition of Qualified Small Business Stock (QSBS) acquired after September 27, 2010 and before January 1, 2011, and 75% of the gain from such stock acquired after February 17, 2009 and before September 28, 2010. Before the new law, the gain exclusion was to revert to 50% for stock acquired after December 31, 2010. In order to qualify for the exclusion, the QSBS must be held for at least five years.

The 2010 Act extends the 100% exclusion of gain from the sale of QSBS to stock acquired before January 1, 2012 (Code Section 1202(a)(4), as amended by Act Section 760).

What is QSBS?

QSBS must meet all of the following conditions:

  • The taxpayer acquired the stock at original issues in exchange for money or property other than stock
  • The stock was issued after August 10, 1993
  • The issuer of the stock was a “qualified small business” when the stock was issued
  • The corporation meets an active business requirement
  • The corporation is a C corporation when the stock is sold

What is a “qualified small business”?

Qualified small businesses are domestic C corporations that do not have more than $50 million in assets with at least 80% of its assets used in the active conduct of one or more qualified trades or businesses. Disqualified activities include professional and business services and rental activities.

The largest limiting condition is the C corporation requirement due to double taxation. However, an existing C corporation wishing to raise additional capital can offer investors an opportunity for 100% capital gain exclusion for new shares issued through the end of 2011.