Act before the Deadline: Exclusion of 100% of QSBS Gain: Take Steps before the End of 2013 to Apply Favorable Rules on Gain from the Sale of Qualified Small Business Stock

EXECUTIVE SUMMARY * Qualified small business stock (QSBS) acquired before the end of 2013 and held for five years before sale qualifies for a 100% exclusion from income of any capital gain upon its sale, for regular and alternative minimum tax purposes. * To qualify as QSBS, the stock must be issued by a C corporation with total gross assets of $50 million or less at all times and at least 800/0 of whose assets are used in an trade or business. * To qualify to exclude the gain, a taxpayer must be a noncorporate shareholder who has held the stock since it was issued. There are also limits on the amount of stock that can be excluded. * QSBS is even more valuable now that the capital gain tax rate is higher for high-income taxpayers. The gain from the sale of QSBS is also not subject to the new 3.8% tax on net investment income. * Taxpayers have a narrow window to acquire stock that qualifies for the 100% exclusion (the stock must be held for five years before it is sold regardless). They must acquire the stock by Dec. 31,2013. ********** Taxpayers have a short window in which to act if they want to take advantage of the Sec. 1202 provision that allows exclusion of 100% of the gain realized on the sale or exchange of qualified small business stock (QSBS). Unless the law is amended, for QSBS acquired after Dec. 31, 2013, the Sec. 1202 exclusion percentage will fall to 50%, and an alternative minimum tax (AMT) preference will further erode the exclusion's advantages. Currently, Sec. 1202 allows exclusion of 100% of the gain realized on the sale or exchange of QSBS for stock that is acquired after Sept. 27, 2010, and before Jan. 1, 2014, and held for more than five years. The exclusion applies to noncorporate taxpayers within certain tax-year limits. In addition, the Sec. 57(a)(7) AMT preference for a portion of the gain excluded under Sec. 1202 does not apply to QSBS purchased within this period (Sec. 1202(a)(4)). Because the deadline for acquiring stock that will qualify for the more favorable treatment is rapidly approaching, investors should plan to complete any purchases of stock that could qualify as QSBS before the end of the year. REQUIREMENTS UNDER SEC. 1202 Qualified Small Business Stock Stock qualifies as QSBS only if it meets all of the following tests: * It must be stock in a C corporation (i.e., not S corporation stock) originally issued after Aug. 10, 1993. * As of the date the stock was issued, the corporation was a domestic C corporation with total gross assets of $50 million or less (a) at all times after Aug. 9, 1993, and before the stock was issued, and (b) immediately after the stock was issued. Gross assets include those of any predecessor of the corporation, and all corporations that are members of the same parent-subsidiary controlled group are treated as one corporation. * In general, the taxpayer must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property or as compensation for services (other than as an underwriter) to the corporation. * During substantially all the time (a term that is not defined in the statute or in IRS guidance) the taxpayer held the stock: ** The corporation was a C corporation; ** At least 80% of the value of the corporation's assets was used in the active conduct of one or more qualified businesses; and ** The corporation was not a foreign corporation, domestic international sales corporation (DISC), former DISC, regulated investment company (RIC), real estate investment trust (REIT), real estate mortgage investment conduit (REMIC), cooperative, or a corporation that is eligible to make (or has a subsidiary that is eligible to make) a Sec. 936 election. Per-Issuer Limit For each tax year, for each corporation in which the taxpayer sells or exchanges QSBS, the amount of gain eligible for the exclusion cannot exceed the greater of: * $10 million ($5 million for married persons filing separately), less the total amount of eligible gain (i. …