Investing in qualified small business stock has many advantages, one of which is the ability to roll over proceeds from a sale into a new qualified small business and defer the gain under Section 1202. Recently, temporary qualified small business stock exclusion amounts have clients to 100% and incur a lower rate on gains subject to the alternative minimum tax.
Benefits of Section 1202
The main advantage of Section 1202 is that the gain on any sale of qualified small business stock purchased after September 27, 2010 and on or before December 31, 2011, which is held for more than five years, is not subject to regular income tax or the alternative minimum tax. This is a major advantage for those who have bought their stock within the window of opportunity.
Requirements for Full Exclusion
There are three requirements that a qualified small business stock must meet in order to qualify for the 100% exclusion explained above. They are:
1. The qualified small business stock must be acquired after September 27, 2010 and before January 1, 2012.
2. The qualified small business stock must be held for more than 5 years before selling it.
3. The amount of gain eligible for exclusion is limited to the greater of $10 million or ten times the taxpayer’s investment in the qualified small business stock.
It is important to have documentation of when the stock was bought and sold because these rules are concrete.
Who is Eligible?
Only non corporate taxpayers are eligible for the exclusion. This includes individuals, estates, trusts, LLCs, partnerships, and S corporation shareholders. LLC and partnership owners must not be classified as a corporation for income tax purposes.
Current Applicable Exclusion Rates
Here are all the current applicable exclusion rates that would apply to the sale of qualified small business stock:
1. Aug 11, 1993 through Feb 16, 2009 – 50%
2. Feb 17, 2009 through Sept 27, 2010 – 75%
3. Sept 28, 2010 through Dec 31, 2011 – 100%
4. Jan 1, 2012 and later – 50%