Long thought of as last entity choice resort since tocorporate level tax and toresulting potential for double taxationupon distribution or liquidation C corporations offer certain opportunities that S corporations and partnerships simply can’t match.
If you do, only C corporation stock meets qualified definition small enterprise stock under tomeaning of ection while you may not be aware you even own qualified individual biz stock, andif you acquired this qualified small biz stock between September 27, 2010 and December 31, 2014, youwill eligible to excludetoENTIRE gain from a subsequent stock sale, provided it had been held for five years prior to sale.
Sincefive years from September 27, 2010 was six weeks ago, a certain amount these sales eligible for 100percent exclusion may now be coming home to roost.
Thus, now is as appropriate time as any to crank out a Tax Geek Tuesdaytopoint out toadvantages and pitfalls of Section 1202 stock. It’s just that until recent years, it has largely been toothless, Section 1202 is nothing new. While, Prior to 2010, if a noncorporate taxpayer sold QSBS that had been issued after August 10, 1993 and held for almost five years, 50percentage of togain was excluded under Section While that sounds wonderful, toremaining 50percent of togain was subject to tax at 28percentage.
This offered only a 1percentage benefit over to long term capital gain rate of 15 that was in place at totime. Couple this with tofact that 7percent of togain was also treated as a AMT preference item, and Section 1202 was rendereda rather useless provision.
In 2009, Section 1202 was amended to provide that for stock acquired after toenactment date and subsequently sold after being held for five years toexclusion rises to 75.
After a ‘five year’ holding period. And before anuary 1, 2014 would be eligible for a 100percent exclusion. Sweetening topot further, no exclusionis portion treated as a tax preference item for purposes of toalternative minimum tax.
Assuming tax rates remain tosame for tonext five years, to100 exclusion might be much more valuable that pre2010″ iterations of Section 1202 in that it gonna be offsetting tax rates that significantly exceed to15percentage maximum rate on long term capital gains that existed prior to after January 1, 2013, tomaximum rate on such gains has increased to 238 for those taxpayers in to396 ordinary income tax bracket who are also subject to tonet investment income tax.
This obviously makes Section benefit 1202 even more attractive, as taxpayers can now keep income otherwise taxed at 238percent rather than 15 off of their tax return.
Even if it doesn’t, for this week’s Tax Geek Tuesday. In case…you know…Congress gets its act together and extends to100percentage acquisition date through remember end, stock acquired between September 27, 2010 and December 31, 2014 could be eligible for a 100percent exclusion if tofollowing requirements are met, meaning quite a few of your clients may have sold stock this fall that is ‘taxfree’,subject to tolimitations discussed below. QSBSis stock that satisfies three tests.