100% tax-free gains on small company investments (HR 5297)

The Small Business Jobs Act of 2010 (HR 5297) was signed into law on Sep. 27, 2010. Among many other provisions, this one really stood out to me. It basically says that stock purchased from a small company (less than $50M in assets) by the end of this year is exempted from capital gains with a five year holding period.

That’s up to $10M in gains or 10x the original purchase price. It’s a tremendous tax benefits for private investors.

http://tax.cchgroup.com/legislation/Small-Business-Jobs-Act-7-23-10.pdf

100% Exclusion of Small Business Capital Gains

Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and before January 1, 2012, the exclusion is increased to 75 percent. At the time of sale, however, 28% of the excluded gain will be treated as a tax preference item subject to the alternative minimum tax (AMT).

Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation.

This bill would temporarily increase further the amount of the exclusion to 100 percent of the gain from the sale of qualifying small business stock that is acquired after the date of enactment in 2010 and held for more than five years. Additionally, the bill would eliminate the AMT preference item attributable for that sale. This provision is estimated to cost $517 million over ten years.

[UPDATED: Feb. 1, 2011]

Administration Will Propose Permanent Elimination of the Capital Gains Tax on Certain Small Business Stock

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provides a 100-percent exclusion from tax for capital gains realized on the sale of certain small business stock held for more than five years.

The amount of gain eligible for the exclusion is limited to the greater of $10 million or ten times the taxpayer’s basis in the stock. This provision applies to qualified small business stock issued after December 31, 2010, and before January 1, 2012.

The Administration’s FY12 budget proposal would make this provision permanent, increasing private sector investment in small businesses. See http://www.whitehouse.gov/startup-america-fact-sheet for additional information.