Fitzgerald Abbott & Beardsley LLP
December 15, 2010
In September of this year, President Obama signed the Creating Small Business Jobs Act of 2010 into law. One of the primary attractions of this law is that for stock purchased between September 27, 2010 and December 31, 2010, a taxpayer will not have to pay any capital gains tax on the gain attributed to that stock at the time the taxpayer sells the stock.
Under the old law: a taxpayer who sold qualified small business stock could exclude 50% of any capital gains from the sale of that stock if the taxpayer held the stock for more than five years prior to the sale.
In early 2009, Congress revised the law so that a taxpayer could exclude 75% of any capital gains for the sale or exchange of qualified small business stock acquired after February 17, 2009 and before January 1, 2011. However, under this new law, that 75% exclusion was further increased to a 100% exclusion of capital gains from the sale or exchange of qualified small business stock acquired after September 27, 2010 and before January 1, 2011.
In order to qualify for the 100% elimination of federal1 capital gains taxes granted by the Creating Small Business Jobs Act of 2010, the following criteria must be met:
• Qualified small businesses are limited to domestic C-corporations only. As a result, a taxpayer who invests in an S-corporation, a limited liability company or a limited partnership will not qualify for this exclusion.
• Stock must be acquired directly from the corporation as original issue.
• Payment for the stock must be in the form of money, other property (not including stock) or as compensation for services provided to the corporation.
• At all times prior to and after the stock is issued, the gross assets of the corporation must be less than $50 million.
• The corporation must use 80% or more of the value of its assets in the active conduct of one or more qualified businesses. Corporation that do not engage in a "qualified business" include any business that operates a hotel, restaurant, farm or any businesses that involves the performance of services in the fields of health, law, engineering, architecture, accounting, financial services, brokerage services, or any business where the principal asset is the reputation or skill of one or more of its employees.
• Finally, the taxpayer must hold the stock for a minimum of five years before selling the stock.
If you are considering investing in or starting a qualified small business before the close of 2010, please consider the impact of this Act with your lawyer or CPA.
1 California capital gains taxes may still apply.