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Seize tax break for QSBS - Emil Estafanous, CPA : Emil Estafanous, CPA

Seize tax break for QSBS

The new small business law — the Small Business Jobs Act of 2010 — enhances a tax break for investments in “qualified small business stock” (QSBS). But you will have to move fast to recognize the full tax benefit of the change — it expires after Dec. 31, 2010.

First, here’s some background information. Under prior law, you could exclude capital gains tax on up to 50% of the gain from the sale of QSBS if certain requirements are met. For starters, the investor must hold the stock for at least five years. Also, the stock must have been directly issued to the owner or given to him or her by someone who received the original shares.

Moreover, there’s a catch: The capital gains tax for QSBS is 28%. Because an investor in QSBS was taxed on half of the gain, the actual tax rate was14% (50% of 28%). In contrast, the maximum tax rate for long-term capital gain (i.e., gain on stock held for more than a year) for 2010 is 15% — or just one percent higher.

In addition, 7% of the excluded gain was treated as a tax preference item for alternative minimum tax (AMT) purposes.

The economic stimulus law enacted last year — the American Recovery and Reinvestment Act of 2009 (ARRA) — created a temporary benefit for investors in QSBS. It increased the maximum tax exclusion for QSBS from 50% to 75% for QSBS acquired after Feb. 17, 2009 and before Jan. 1, 2011. This effectively reduces the capital gains tax bite to 7%. So the effective tax bite is lowered to only 7% (25% of 28%) — less than half of the regular capital gains tax rate.

Now the new small business law expands the tax break. For acquisitions in QSBS between Sept. 28, 2010 and Dec. 31, 2010, the maximum exclusion is increased to 100%. Furthermore, gain from the sale of QSBS acquired within the same timeframe won’t be treated as an AMT tax preference item.

Therefore, investors only have until the end of the year to gobble up QSBS before this unique tax loophole slams shut (barring any last-minute extension by Congress). The lure of the future tax exclusion becomes even stronger if capital gains rate rises after 2010 as scheduled.

If you have any questions regarding this new tax break, or other provisions in the new small business law, contact us at 562-868-6333. We would be glad to provide assistance.

P.S.  The tax break for QSBS is scheduled to vanish on Dec. 31. Call us at  562-868-6333  for more information.

About Emil Estafanous, CPA
Certified Public Accountant (CPA) Tax Professional committed in representing taxpayers and resolving their tax problems.

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