Tax break may expire for owners of small business stock

If you own stock in a small business corporation, check to see whether you qualify for an important tax break.

Since 1993, the tax law has contained a tax exemption for part or all of the gain that individuals realize on the sale of qualified small business stock that they have owned for more than five years. The portion of the gain that is excluded from tax is at least 50 percent, and can be as high as 100 percent, depending upon when you originally acquired the stock. Similarly, the portion of the excluded gain that is subject to the alternative minimum tax (AMT) varies with the acquisition date.

For regular tax purposes, a 50-percent exclusion is available for qualified stock acquired after Aug. 10, 1993, and held for more than five years. The exclusion is increased to 60 percent for qualified stock issued by a corporation located in an Empowerment Zone. The exclusion is 75 percent for stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100 percent for stock acquired after Sept. 27, 2010, and before Jan. 1, 2012.

The maximum qualified gain in any given year from the sale or exchange of qualified stock issued by a single issuer may not exceed the greater of:

  • $10 million ($5 million for married taxpayers filing separately) reduced by the aggregate amount of eligible gain realized in prior taxable years attributable to dispositions of stock issued by the same corporation; or
  • 10 times the aggregate adjusted basis of qualified stock issued by the corporation and disposed of during the current year.
  • Qualified small businesses are limited to domestic C corporations with aggregate gross assets under $50 million, before and after the issuance of the stock. You must acquire the qualified stock at its original issue, either directly or through an underwriter. You must acquire the stock by purchase, in exchange for property other than stock (e.g., no stock via reorganization is allowed) or as compensation for services you provided to the corporation. The rules as to what constitutes qualified small business stock are complex and highly technical. If you think you own stock that may qualify, consult with your tax advisor before selling any shares.

Absent congressional action, the original 50 percent or 60 percent gain exclusion rules, as well as more severe AMT treatment, will again be in effect for qualified stock acquired after Dec. 31, 2011. If you are considering an investment in a qualified small business, are expecting to receive stock as compensation from such a business or are planning to incorporate your business, you may want to take steps to complete the transaction before the end of this year to potentially secure the benefits of the 100 percent exclusion.

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