Still Time to Take Advantage of Tax-Free Investment in Small Business Stock

With all of the uncertainty in the markets recently, now is a great time to take another look at one way to create jobs with tax free investment. But you only have a few more months to take advantage of it. Remember the Small Business Jobs Act of 2010?  How about the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2011?  Well, if you are a small businesses, a provision of these laws give investors, founders, and other stockholders the right to purchase certain types of small business stock and then sell that stock with tax-free gains of up to $10 million, provided you act quickly and then exercise a little patience.

United States Code Section 1202 was revised to exclude 100% of gains from the sale of "qualified small business stock" and that exclusion counts for both income tax and alternative minimum tax purposes.  But here is some fine print:

  • the company must be a C corporation (if you are taking advantage of the flow-through tax treatment of an S corp, you are out of luck);
  • the stock must be acquired between September 27, 2010 and January 1, 2012, and must be held for five years before being sold;
  • and at least 80% of the assets of the company must be used for one or more qualified businesses.
There are other provisions that may apply to your company as well, so you should review this carefully with your legal and accounting advisors.  But for those companies that meet the conditions, now could be the time to take advantage this temporary opportunity.