E-Alert
August 2, 2011
Why is Qualified Small Business Corporation (QSBC) Stock a Hot Topic?
QSBC's are a special breed of the C corporation species. The difference between QSBCs and garden-variety C corporations is that QSBC stock is potentially eligible for 1) several different gain exclusion treatments and 2) a tax-free gain rollover treatment.
Under the general rule, QSBCs are potentially eligible to exclude from federal income tax up to 50% of the gains from selling their shares. The Stimulus Act increased the QSBC gain exclusion percentage to 75% for shares purchased between 2/18/09 and 9/27/10. Changes included in the 2010 tax acts created a 100% gain exclusion break for QSBC shares issued between 9/28/10 and 12/31/11. The gain eligible for the exclusion is subject to certain limitations.
Therefore, QSBC shares issued between now and year-end are potentially eligible for a 100% gain exclusion break. Wow! That's why QSBCs are a hot topic.The gain exclusion breaks are cool, but please don't get too excited. A more than five year holding period rule must be satisfied before any gain exclusion is allowed.
In addition to the gain exclusion break, there is also a tax-free gain rollover deal for eligible QSBC shares. This is available if the original shares are held for more than six months and the replacement shares are purchased within a 60 day period from the date of the original share sale.
To be eligible for the QSBC gain exclusion and gain rollover breaks, stock must meet specific requirements. Some of these requirements include the following:
- The C corporation must be acquired after 8/10/93 and upon original issuance or through gift or inheritance
- The corporation must satisfy an active business requirement test
- The gross assets cannot exceed $50 million at all times on or after 8/10/93 and before the stock was issued and immediately after the stock was issued.
These are just some of the rules but there are lots more. As always, please consult with your DZH Phillips tax advisor.
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If you have any questions regarding this issue, please contact the DZH Phillips Tax Department at (415) 781-2500 or email cpas@dzhphillips.com.
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