Qualified Small Business Stock Rules Provide a Unique Opportunity

If you are a Small Business owner ($50m and below in assets), investor or employee, or you consult with these entities, please note that stock acquired through December 31, 2010, held for 5 years and then sold, there is 0% tax on the capital gains.

Furthermore, the gain on stock issued during this period will not be subject to the AMT. This provides a unique opportunity for small businesses to call upon investors, employees and others in order to raise additional capital. Some specifics of the rules are as follows:

What is a "Qualified Small Business Stock"?
Any stock in a C Corporation whose:

  • Gross assets < $50Million (including the proceeds from the stock issuance) and
  • Which meet the "active business requirement"
  • Must be held for more than five years in order to qualify for exclusion

How does a company meet the "active business requirement"?

  • At least 80 percent (by value) of the assets of such corporation must be used by the corporation in the active conduct of 1 or more "qualified trades or businesses", and 
  • The corporation must be an "eligible corporation"

Which businesses are NOT considered a "qualified trade or business"?

  • Any trade or business involving the performance of services in the fields of health care, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any other trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees
  • Banking, insurance, financing, leasing, investing, or similar business
  • Farming business (including the business of raising or harvesting trees)
  • Any business eligible to claim a deduction for depletion
  • Businesses of operating a hotel, motel, restaurant, or similar business

What is an "eligible corporation"?

  • Any domestic C corporation
  • That is not a:
    • DISC or a former DISC
    • Corporation with respect to which an election under section 936 (Puerto Rico & Possession Tax Credit) is in effect or which has a direct or indirect subsidiary with respect to which such an election is in effect
    • Regulated investment company, real estate investment trust, or REMIC
    • Cooperative

Please note that this information is intended as a brief summary of the rules and regulations regarding Qualified Small Business Stock and does not represent a complete overview of the Internal Revenue Code rules and regulations.

If you would like to take advantage of this opportunity, please consult with your EisnerAmper engagement team.

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