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TAX TALK: QSB Stock Offers 2 Valuable Tax Benefits

Posted by Hal Zemel, CPA, J.D., LL.M. on May 9, 2016 1:00:00 PM
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Investing in qualified small business (QSB) C corporation stock offers you the opportunity to diversify your portfolio and enjoy two valuable tax benefits:

  1. Tax-free gain rollovers. If you buy other QSB stock with the proceeds of selling QSB stock within 60 days, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.
  2. Exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude up to 50% of their gain if they’ve held the stock for more than five years. But, depending on the acquisition date, the exclusion may be greater: The exclusion is 75% for stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100% for stock acquired on or after Sept. 28, 2010. The acquisition deadline for the 100% gain exclusion had been Dec. 31, 2014, but Congress has made this exclusion permanent.

The taxable portion of any QSB gain will be subject to the lesser of your ordinary-income rate or 28%, rather than the normal long-term gains rate. Thus, if the 28% rate and the 50% exclusion apply, the effective rate on the QSB gain will be 14% (28% × 50%).

As you might expect, these tax benefits are subject to additional requirements and limits. For example, to qualify as a QSB, a business must be engaged in an active trade or business and must not have assets that exceed $50 million.

Also, be sure to consider the non-tax factors as well, such as your risk tolerance, time horizon and overall investment goals.

Should you wish to discuss the tax ramifications of the possible sale of QSB stock, contact me at hzemel@berdonllp.com or your Berdon advisor.

Topics: TAX TALK

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