The following is a re-print of a Dorsey & Whitney tax alert that can be found here. This benefit is only available for a very limited time, but it is quite significant for investors that can take advantage of it. Angel investors making investments in this time frame might want to consider buying equity rather than convertible debt in order to take advantage of this benefit.
This is a follow-up to my post here.
Temporary Exclusion of 100 Percent of Gain on Qualified Small Business Stock
Recently enacted legislation provides investors with a potentially significant tax benefit for qualified small business stock acquired before the end of this year. The Small Business Jobs and Credit Act of 2010 contains a number of provisions aimed at encouraging investment in small businesses. These provisions include an amendment to Section 1202 of the Internal Revenue Code of 1986, as amended (the “Code”), temporarily permitting the exclusion of 100 percent of the gain from the sale of certain “qualified small business stock” acquired after September 27, 2010 and before January 1, 2011 that is held for more than five years by a non-corporate taxpayer. The amendment also provides that the excluded amount will not be a tax preference item for purposes of calculating alternative minimum tax. As a result, the effective federal income tax rate on any capital gain from the sale of qualified small business stock that qualifies for the 100 percent exclusion will generally be zero. The amount of gain that a taxpayer may exclude with respect to stock in a particular corporation is limited to the greater of $10,000,000 or ten times the taxpayer’s adjusted basis in the qualified small business stock.
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