Beginning in 2015, IRS code section 1202 allows individual taxpayers to exclude from federal income tax 100 percent of the gain on the sale of certain qualified small business stock (QSBS).
The gain not taxed (excluded) is limited to the greater of $10 million, or 10 times the adjusted tax basis (cost usually) of the investment in C corporation stock.
As you guessed, there are some special rules:
The stock must have been directly acquired by way of an original issuance from a U.S. “C” corporation. IRC section 1202(c)(1)
Both before and after the stock purchase, the C corporation’s tax basis (cost) in the gross assets did not exceed $50 million.
The C corporation and the shareholders must consent to supply documentation regarding the QSBS status.
The C corporation conducts certain qualified active trades or businesses (see below for all the companies that do NOT qualify for this benefit).
The stock must have been held (owned) for more than five years.
The “devil is in the details” again. Many C corporations do not qualify. Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade of business where the principal asset of the trade or business is the reputation or skill of one or more of its employees do not qualify.
Also, any banking, insurance, financing, leasing, investing or similar businesses do not qualify. Also, any farming business, any business involving the production or extraction of products of a character for which a depletion deduction is allowable (mining, oil and gas) and any business of operating a hotel, motel, restaurant or similar business do not qualify.
So what kind of businesses do qualify for this tax benefit? Manufacturing, retail sales, wholesale sales and a business with computer software royalties are a few of the main ones.
There are other requirements, but if you think your C corporation investment might qualify, it is worth checking into with your CPA firm.
Did you hear? “Service is the best way to forget our own troubles,” by Medra Pattillo.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.
