Are You Eligible for Tax-Free Capital Gains? How Business Founders and Investors Can Exclude Up to 100% of Their Capital Gains from Federal Income Taxes under the Qualified Small Business Stock Exclusion
The following article is reproduced with permission from Copyright 2019
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Summary: The qualified small business stock exclusion allows qualified business founders and investors to exclude from federal income tax some or all of the capital gains they realize on qualifying stock sales. Eric Bardwell and Catherine DeBono Holmes of Jeffer Mangels Butler & Mitchell LLP show how to take advantage of the exclusion.
INSIGHT: Are You Eligible for Tax-Free Capital Gains?
By: Eric Bardwell, Esq. and Catherine DeBono Holmes, Esq.
Tax code Section 1202 allows taxpayers to exclude up to 100% of the capital gains they realize on the sale of “qualified small business stock” (or “QSBS”) held for at least five years (Section 1202(a)). This provision of the tax code was added in 1993, but it originally allowed only 50% of eligible capital gains to be excluded. In 2009, the percentage of capital gains eligible for exclusion was increased to 75%, and in 2010, this percentage was increased to 100%, and the QSBS incentive was made permanent (Sections 1202(a)(3) and (4)). Many business owners and investors, as well as their tax advisors, are still not aware that they may be eligible for this benefit. In addition, existing small businesses and start-up founders may not be aware that the QSBS exclusion could enhance their ability to raise capital from investors seeking to boost their after-tax profits from investment in small and start-up businesses. This article explains the basic requirements to qualify for the exclusion and discusses tax planning opportunities to optimize the exemption.
What is QSBS?
QSBS is stock that meets the following requirements: Continue reading →