Country / Language

QSBS Capital Gains Exclusion Offers Key Incentive for Small Business Investment


3/7/16

Synopsis
 
The Protecting Americans from Tax Hikes Act of 2015 (PATH) includes the permanent extension of the Qualified Small Business Stock Gains Exclusion under Section 1202. This is a very attractive tax incentive offering up to 100% capital gain exclusion on certain dispositions of qualified small business stock (QSBS) acquired after September 27, 2010.
 
Section 1202 has been in existence since 1993. However, it did not offer a significant tax benefit until the exclusion rate was increased to 100% in 2010. The recent legislation making the 100% gain exclusion permanent allows for planning to take advantage of this attractive provision. Section 1202 encourages investment in new ventures and small businesses by granting tax relief to investors who acquire, and then sell, stock in these businesses.
 
Requirements under Section 1202 – Qualified Small Business Stock (QSBS)
 
The rules in determining eligibility for the Section 1202 small business stock gains exclusion are somewhat complex and the requirements are fairly stringent, the most significant of which are:

  • The QSBS must be from a C Corporation
  • The taxpayer must be a non-corporate taxpayer.
  • The QSBS must be held for more than five years to qualify for the 100% exclusion.
  • The stock must have been acquired by the taxpayer at original issue, either directly or through an underwriter, in exchange for money or property (not including stock), or as pay for services provide to the corporation (other than services performed as an underwriter of the stock).
  • The C Corporation must have total gross assets of $50 million or less at all times after August 9, 1993 and immediately after it issues the stock.
     

Section 1045: Rollover of Gain
 
In addition to the Section 1202 capital gain exclusion, taxpayers can also benefit from Section 1045. This provision allows a tax-free rollover of gain from the same QSBS held more than 6 months. However, to qualify for this rollover, a taxpayer must meet the following requirements:

  • The taxpayer must be a non-corporate taxpayer.
  • The taxpayer must have at least a 6 month holding period for the QSBS stock that was sold.
  • The taxpayer must make an election under section 1045 on or before the due date for filing their tax return (including extensions).
  • The taxpayer must purchase replacement QSBS within 60 days from the date of sale.
  • The replacement stock continues to meet the active business requirement for small business stock for at least the first 6 months after purchase.
     

What Does CohnReznick Think?
The permanent extension of the QSBS tax provisions under PATH presents a unique tax planning opportunity for small businesses, as well as their financial advisors, to consider equity investments over other forms of raising capital. We encourage these companies to speak with their tax advisors to consider this opportunity and to ensure that all of the Section 1202 requirements are considered and factored into their planning.
 
Contact
 
For more information, please contact Jay Levy, Partner, at 646-254-7412 or jay.levy@cohnreznick.com, or David Logan, Partner, at 646-601-7794 or david.logan@cohnreznick.com. To learn more about CohnReznick’s Financial Services Industry Practice, visit our webpage.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More