Tuesday, November 23, 2010

Zero Taxes on Gains on Small Business Investments

President Obama recently signed the Small Business Jobs Act of 2010.  This  includes several benefits for small businesses  investments made between September 27 and December 31, 2010.

The new law includes a 100 percent exemption for gains made in Qualified Small Business Stock. If you are interested in this program, talk to your tax professional to ensure you have all the information you need to structure your investments to meet all requirements.

Criteria and Limitations:
•Investments must be made by a non-corporate investor (for example, individuals or funds structured as LLCs).
•Investments must be made between September 27 and December 31, 2010 to qualify for no taxes on the gains.
•The company in which you invest must be a C corporation and must be a qualifying type of business (many businesses except financial institutions, farms, professional service firms, hotels, and restaurants).
•The company in which you invest must not exceed $50 million in aggregate gross assets at any time before the investment or immediately afterward. An important issue in this size is that 80% of the assets must be used in the “active conduct” of the business at all times.
•The stock must be purchased by the investor as an original issuance from the corporation, directly or through an underwriter. So, notes and warrants do not count. We’re hearing that if you have an outstanding note that converts to stock before December 31st, then the stock would count for this program. (BUT TALK TO YOUR ACCOUNTANT.)
•The stock must be held for more than five years (subject to exemptions for qualifying tax-free rollovers)
•There are limitations on redeeming shares of the company’s stock before and after the qualified stock is issued.
•The gains eligible for the zero taxes by any single taxpayer max out at $10 million or ten times the adjusted tax basis of stock issued by the stock
•For just investments made between September 27 and December 31, 2010, the gains are also not subject to the Alternative Minimum Tax.

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