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Qualified Small Business Stock


Holding stock in a small C Corporation and wanting to sell it, but you don’t want to pay high taxes on the gain? There may be a simple solution to this. Depending on when the stock was purchased and when the business was incorporated, there could be some exclusions to your gain.

If you held stock in a C Corporation for at least 5 years and the corporation had less than $50 million in gross assets at the time of your investment, this could possibly qualify for the Section 1202 exclusion. Of course with every exclusion comes qualifications and limitations.

In order to qualify for the exclusion, stock should have been issued between August 10, 1993, and February 17, 2009, in order to reduce the gain by 50%. Stock issued between February 17, 2009, and September 27, 2010, would reduce the gain by 75%. Lastly, stock issued after September 27, 2010, can get an exclusion of 100%.

There are two limitations to the amount of a gain a taxpayer can exclude. The gain cannot exceed the greater of $10 million or 10 times the basis in the qualified small business stock.

Let’s say a taxpayer purchased stock in a small business on October 29, 2011, for $50,000. This taxpayer can sell these stocks any time after October 29, 2016, and be eligible for the qualified small business stock exclusion of 100%. Now let’s say this taxpayer does sell their stock on October 30, 2017, for $13 million. The taxpayer is allowed to the take the exclusion of $10 million or 10 times their basis in the stock, which would be $500,000. The taxpayer is going to take the exclusion of $10 million reducing their gain from $12,950,000 to $2,950,000.

Normally, 7% of the gain from a qualified small business stock would be added back to taxpayers subject to the AMT. However, for stock qualifying for the 100% exclusion, there is no longer an AMT tax preference item.

Not all states adhere to what the federal taxes are. When it comes to Section 1202, Massachusetts has a different set of rules. Massachusetts only allows the 50% exclusion from gain, regardless of the date of acquisition.  Massachusetts also has a reduced 3% rate on the taxable gain of stock that meets some different qualifications.  To qualify for the 3% rate, stock must be held for three years or more and the investment must be in a corporation which (a) is domiciled in Massachusetts, (b) is incorporated on or after January 1, 2011, (c) has less than $50 million in assets at the time of the investment, and (d) is an “active business” under section 1202 of the Internal Revenue Code.  Massachusetts does allow S Corporations to qualify for the reduced 3% rate.

Brittany Wright, Senior Accountant at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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