As part of the American Recovery and Reinvestment Act (ARRA), investors in qualified small business stock can exclude 75 percent of the gain when they sell their stock. You usually can exclude up to 50% of your gain from your income from the sale or trade of qualified small business stock. See http://www.irs.gov/pub/irs-pdf/p550.pdf for more. This exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. In most cases, the exclusion rate for previously-acquired stock remains at 50 percent. The remaining gain will be taxed at a lower rate than what generally applies to one’s income. These lower rates are called the maximum capital gain rates.
So, how do you know if you are eligible for the tax incentive? In order to know whether it applies to you, you need to understand how the IRS defines small business and small business stock.
Description of qualified "small business": To qualify as a small business for the exclusion
- The stock must be in a C corporation
- The corporation’s gross assets cannot have exceeded $50 million when the stock was issued
- The corporation, including all “over 50-percent-owned” subsidiaries, cannot have gross assets that exceed $50 million. This includes cash, the value of contributed property, and the bases of other assets, without regard for short-term debt.
If you are an investor, talk to your CPA or tax attorney to make sure you qualify for this tax break. Hopefully this new incentive will help you out next tax season. I wish everyone success in their investing adventures!