PPT for 2011 tax changes about Gain Exclusion for Small Business Stock, presented by Jode A. Beauvais, CPA, MossAdams to the TacomaAngel Network, Feb. 9, 2011.
1. A Big Opportunity for Small Business Gain Exclusion for Qualified Small Business Stock Presented by: Jode A. Beauvais, CPA
2.
3. Background Code Section 1202 of Internal Revenue Code Original Law: Exclude 50% of gain on sale of qualified small business stock (QSBS) however included in add back for alternative minimum tax (AMT) Current law: Exclude 100% of gain on sale of qualified small business stock (QSBS) no AMT add back
4. What qualifies as QSBS Domestic C Corporation stock Must be original issuance Corporation’s gross assets cannot exceed $50 M Stock must be acquired in exchange for money or property or compensation for services
5. How does it qualify for the exclusion Must be purchased between September 28, 2010 and December 31, 2011 Must hold the stock for at least 5 years
6. Who is eligible Individuals LLC/Partnerships S Corporations Trust/Estates
7. What are the limitations Limitations on how much gain can be excluded $10,000,000 or 10 times the basis whichever is greater
8. What are the limitations Example Jennifer purchases 500 shares of Company X for $100,000. She holds the stock for 10 years and then sells it for $15,000,000 Maximum gain excludable $10,000,000
9. What type of business’ qualify Corporation must use 80% of it’s assets in a qualified trade or business Qualified trade or business – other than Banking, insurance, finance, leasing or investing Farming business Any business of operating a hotel, motel, restaurant or similar business Any business involving the performance of services – health, law, engineering, accounting
10. Rollover of QSBS Gain If gain is recognized on sale of QSBS Can elect to defer gain by purchasing new stock within 60 days of sale date Gain is recognized to the extent proceeds exceed purchase price of new stock Holding period of stock continues with new stock Election must be filed with tax return
11. Rollover of QSBS Gain Charlie invests $400,000 in Eagle Corp. on 8/22/09 On 10/1/10 Charlie sells the Eagle stock for $625,000, resulting in a $225,000 gain. On 10/13/10 he purchases stock in newly formed Hawk Corp for $600,000
12. Rollover of QSBS Gain Charlie can elect to roll over the gain from the sale of the Eagle stock He recognizes only $25,000 of the gain because this is the amount the sales proceeds ($625,000) exceed his investment in Hawk ($600,000). His basis in his Hawk stock is $400,000 ($600,000 cost less deferred gain of $200,000). His holding period carries over from original purchase - 8/22/09
1993 is the first year this law came into play – been around for awhile
Assets are calculated on tax basisStock options do not qualify
From February 18, 2009 - September 28, 2010 – gain exclusion was 75% for regular tax – with AMT add backsPrior to 2/18/2009 – gain exclusion was 50% - with AMT addbacksFor the portion of the gain that is not excludable it was taxed at 28% - so an effective rate of 14% prior to 2009 and 7% With capital gains rates at 15% from 2003 forward – no large benefit until 75% and 100% exclusion