Thinking of Organizing a Business?

The Consolidated Appropriations Act, 2016, Pub. Law 114-113, extended, indefinitely, the 100% exclusion from tax of the proceeds from the sale of qualified small business stock, Int. Rev. Code §1202.

     Briefly, a taxpayer, other than a corporation, can exclude, from federal income tax, 100% of the gain from the sale or exchange of stock which is held for more than five years. The stock must have been issued by a qualified small business and engaged in a “qualified trade or business.” The exclusion was originally set to expire.

     Most new small businesses formed locally are likely to be a qualified small business. Generally, the aggregate gross assets of the corporation cannot ever have exceeded $50,000,000 at the time the stock is issued.

     Many new businesses may not, however, be engaged in a “qualified trade or business.” For example, hospitality, professional and financial services are among the activities that are not considered a “qualified trade or business.”

     Because 100% of the gain is excluded (at least, for the time being), the excluded gain is not treated as a preference item for the alternative minimum tax. In addition, under some circumstances, the gain on qualified small business stock can be deferred if the proceeds are invested in another qualified small business corporation.  

     If a new business expects to be engaged in a qualified trade or business, the owners should consider Section 1202 when organizing the business.