If you are setting up a business as a C Corp. and you are using other people to buy shares of this new corporation, then be aware of this:
Gains from selling qualified small business stock (QSBS) issued between now and year end are eligible for a zero (0) percent federal income tax rate. Shares must be held for over five years to take advantage of this unbelievably good deal, and not all shares qualify.
Whether you are considering obtaining funding for your own business or acting as an investor for someone else's operation, here's what you should know about QSBS and the 0 percent tax rate.
QSBS is stock in a C corporation that meets the definition of a qualified small business corporation (QSBC). In general, QSBCs are the same as garden-variety C corporations for all tax and legal purposes. The only exception is that QSBS gains are eligible for favorable federal income tax treatment.
The most important thing to understand right now is that gains from selling QSBS issued between now and year end are potentially eligible for a 100 percent federal income tax gain exclusion break, which equates to 0 percent federal income tax rate.
On the other hand, for QSBS issued after this year, the gain exclusion percentage will revert to the standard 50 percent unless Congress changes the law to provide something better.
current super-generous 100 percent gain exclusion break is only available for QSBC shares issued between September 28, 2010 and December 31, 2011. Therefore, a share issuance deadline of December 31 of this year applies if you want to line yourself up to benefit from the 100 percent gain exclusion.
The standard 50 percent gain exclusion deal is available for QSBS issued before February 18, 2009 or after December 31, 2011. Therefore, qualified stock issued after this year will be eligible for the standard 50 percent gain exclusion unless Congress takes action.
An enhanced 75 percent gain exclusion is available for QSBS that were issued between February 18, 2009 and September 27, 2010.
In order to take advantage of the gain exclusion deal, you must hold QSBS for over five years. Therefore, the 100 percent gain exclusion break will only be available for sales that occur after September 28, 2015 at the earliest. For QSBC shares that have not yet been issued, the 100 percent gain exclusion will only be available for sales that occur sometime in 2016 at the earliest.
To be eligible for the QSBS gain exclusion break, shares must meet a number of requirements set forth in Section 1202 of the Internal Revenue Code. I am not going to list them here because they are technical in nature and should be researched by your personal tax advisor.
Therefore, when a start-up business can meet the definition of a QSBC if it is incorporated, the conventional wisdom that it is always best to operate as a pass-through entity (S corporation, partnership, or LLC) may be incorrect, due to the tax breaks offered to QSBS owners. Once again, this is a complicated area and should be fully explored by your knowledgable staff.
Lastly, there also are tax free rollover allowances for stock held at least 6 months and preferential treatment on AMT.
This article could be longer and more boring but I have only tried to highlight the major points for your research.
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Always Looking to Acquire Houses | Always Looking to Amaze Investors
If you are setting up a business as a C Corp. and you are using other people to buy shares of this new corporation, then be aware of this:
Gains from selling qualified small business stock (QSBS) issued between now and year end are eligible for a zero (0) percent federal income tax rate. Shares must be held for over five years to take advantage of this unbelievably good deal, and not all shares qualify.
Whether you are considering obtaining funding for your own business or acting as an investor for someone else's operation, here's what you should know about QSBS and the 0 percent tax rate.
QSBS is stock in a C corporation that meets the definition of a qualified small business corporation (QSBC). In general, QSBCs are the same as garden-variety C corporations for all tax and legal purposes. The only exception is that QSBS gains are eligible for favorable federal income tax treatment.
The most important thing to understand right now is that gains from selling QSBS issued between now and year end are potentially eligible for a 100 percent federal income tax gain exclusion break, which equates to 0 percent federal income tax rate.
On the other hand, for QSBS issued after this year, the gain exclusion percentage will revert to the standard 50 percent unless Congress changes the law to provide something better.
current super-generous 100 percent gain exclusion break is only available for QSBC shares issued between September 28, 2010 and December 31, 2011. Therefore, a share issuance deadline of December 31 of this year applies if you want to line yourself up to benefit from the 100 percent gain exclusion.
The standard 50 percent gain exclusion deal is available for QSBS issued before February 18, 2009 or after December 31, 2011. Therefore, qualified stock issued after this year will be eligible for the standard 50 percent gain exclusion unless Congress takes action.
An enhanced 75 percent gain exclusion is available for QSBS that were issued between February 18, 2009 and September 27, 2010.
In order to take advantage of the gain exclusion deal, you must hold QSBS for over five years. Therefore, the 100 percent gain exclusion break will only be available for sales that occur after September 28, 2015 at the earliest. For QSBC shares that have not yet been issued, the 100 percent gain exclusion will only be available for sales that occur sometime in 2016 at the earliest.
To be eligible for the QSBS gain exclusion break, shares must meet a number of requirements set forth in Section 1202 of the Internal Revenue Code. I am not going to list them here because they are technical in nature and should be researched by your personal tax advisor.
Therefore, when a start-up business can meet the definition of a QSBC if it is incorporated, the conventional wisdom that it is always best to operate as a pass-through entity (S corporation, partnership, or LLC) may be incorrect, due to the tax breaks offered to QSBS owners. Once again, this is a complicated area and should be fully explored by your knowledgable staff.
Lastly, there also are tax free rollover allowances for stock held at least 6 months and preferential treatment on AMT.
This article could be longer and more boring but I have only tried to highlight the major points for your research.
Always Looking to Acquire Houses | Always Looking to Amaze Investors