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Taxpayer Relief Act Extends Gain Exclusion Period for Qualified Small Business Stock

Emmalee MacDonaldPreviously, the law permitted 100% exclusion for stock issued between September 27, 2010 and December 31, 2011.  The Taxpayer Relief Act extended this period allowing for qualified stock issued during 2012 and 2013 to qualify for 100% gain exclusion.  This exclusion also applies to the new 3.8% Medicare Contribution Tax on net investment income. 

In addition to extending the exclusion period, the law also provides for more favorable treatment under the alternative minimum tax (“AMT”) regime.  The previous law required that 42% of the excluded gain, or 28% for stock with holding periods that began after December 31, 2000, be added back for purposes of AMT.  The Taxpayer Relief Act made permanent a provision from the Jobs and Growth Tax Relief Reconciliation Act of 2003 which allows for a 7% addback rather than 42% or 28%.  The 7% addback is a permanent change in the law and is effective for tax years beginning after December 31, 2012. 

With capital gains rates rising and the addition of the 3.8% Medicare Contribution Tax, these changes in the law provide significant incentives for investors to seek out investment in qualified small businesses.  The gain exclusion and favorable AMT treatment will help small businesses to attract investment and raise additional capital.  Those companies that believe they can benefit from the Qualified Small Business Stock rules should consider taking advantage of the period of exclusion by seeking to raise additional capital through stock offerings in 2013. 

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