Qualified Small Business Stock: 100% Exclusion To Become Permanent

In the big tax bill the Congress just passed, Congress made the 100% exclusion for gain on qualified small business stock held for more than five years permanent.

You can find the text of the bill at Congress.gov.

Qualified Small Business Stock

You might remember that the Congress has extended the 100% exclusion several times, but only for limited periods of time. Last year, in December, it extended the 100% exclusion for stock issued before January 1, 2015. So, in other words, in December 2014, the Congress only covered off 2014 and didn’t help us with 2015.

This time the Congress has extended the benefit permanently.

Here is how the bill did it:

SEC. 126. EXTENSION OF EXCLUSION OF 100 PERCENT OF GAIN ON CERTAIN SMALL BUSINESS STOCK.
(a) In General.—Section 1202(a)(4) is amended—

(1) by striking “and before January 1, 2015”, and

(2) by striking “, 2011, 2012, 2013, AND 2014” in the heading thereof and inserting “AND THEREAFTER”.

(b) Effective Date.—The amendments made by this section shall apply to stock acquired after December 31, 2014.

The Old Statutory Language

Here is how Section 1202(a)(4) used to look:

(4) 100 percent exclusion for stock acquired during certain periods in 2010, 2011, 2012, 2013, and 2014

In the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010 and before January 1, 2015—

(A) paragraph (1) shall be applied by substituting “100 percent” for “50 percent”,
(B) paragraph (2) shall not apply, and
(C) paragraph (7) of section 57(a) shall not apply.

In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for purposes of this subsection shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223.

The New Statutory Language

And now, with the amendments, here is how Section 1202(a)(4) now reads:

(4) 100 percent exclusion for stock acquired during certain periods in 2010 and thereafter

In the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010—
(A) paragraph (1) shall be applied by substituting “100 percent” for “50 percent”,
(B) paragraph (2) shall not apply, and
(C) paragraph (7) of section 57(a) shall not apply.
In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for purposes of this subsection shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223.

What Was the Date of Enactment of the Creating Small Business Jobs Act of 2010?

September 27, 2010

What is the Practical Meaning?

If you plan to form a startup, the potential of the qualified small business stock benefit is something to keep in mind. It may influence your decision as to what type of entity to form, or as to whether to make an S election (S corp stock doesn’t qualify).

Remember, the exclusion has a cap–but a substantial one–it can be as much as $10M.

This is good news for the startup world. It helps founders of C corps, and investors in C corps.

[This blog does not constitute tax advice, or the formation of an attorney-client relationship. Always consult with your own tax advisor about the particulars of your situation.]

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