The recently enacted 2010 Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting small business. One of the changes could help those who are starting a business this year. It provides a 100% exclusion of gain from the sale of small business stock, with certain limitations. Here are the details.

Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don't exceed $50 million and that meets active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011.

Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after Sept. 27, 2010 and held for more than five years. In addition, the new law eliminates the AMT preference item attributable for that sale.

If you are considering investing in a small business, I would be happy to work with you to determine whether the new total exclusion for QSBS would work to your advantage. However, it should be noted that while the new provision for QSBS is ostensibly intended to encourage investment in small businesses, it may be less effective in that regard than desired, due to the restrictions on obtaining the total exclusion, specifically: (1) the narrow window within which the small business stock must be purchased (i.e., between Sept. 27, 2010 and the end of 2010); (2) the long holding period requirement for QSBS (the stock must he held for at least five years); and, most importantly, (3) the fact that the tax break only applies to investments in C corporations, a form of business organization that is not often used by small businesses, which, for tax purposes, are typically operated as S corporations, partnerships, limited liability companies or sole proprietorships.

We hope this information is helpful. If you would like more details about any aspect of the new legislation, please do not hesitate to contact us.