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HURRY! — Limited time left for Zero Tax Rate on investments in Qualified Small Business Stock

The Small Business Jobs Act of 2010 contained a special provision that gives an exclusion of at least $10 million in gains from tax for investments in qualified small business stock. This special feature was added for a very limited time period, September 28, 2010 through December 31, 2010. The qualified small business stock must be held at least five years. As an added bonus, any gain excluded for investments in the limited time period noted above is also NOT subject to the alternative minimum tax. The excluded amount drops back to 50% after December 31, 2010 (in some cases 60%). Important information about qualified small business stock:

1. Stock must be acquired as part of its original issuance for a domestic C corporation.
2. The aggregate gross assets of the corporation (including the cash received from the stock issuance) must be less than $50 million at all times from August 10, 1993 through and including the date of stock issuance.
3. All corporations in a controlled group of more than 50% ownership are treated as one corporation.
4. At least 80% of the value of the corporation’s assets must be used in an active trade or business.
5. Research and start-up activities can be considered part of an active business.
6. There are provisions in the law that are designed to thwart a company from redeeming stock and reissuing stock as “original issuance.”

This limited-time 100% exclusion replaces the 75% exclusion for qualified small business stock that was in place for 2009 and 2010 and the 50% rate that had been in effect prior to 2009. The qualified small business gains that are NOT excluded are subject to a 28% capital gains rate. Therefore, 75% exclusion equaled a 7% tax rate ([1-75%] x 28%). The problem with the exclusions prior to this recent change is that a portion of the excluded gain was NOT excluded for purposes of the alternative minimum tax. For most gains (other than for the limited-time-period investments noted in the first paragraph) recognized after December 31, 2010 and the holding period started after December 31, 2000, 28% of the excluded amount is included in the alternative minimum tax. This fact causes an effective alternative minimum tax rate of 12.88% (28% x 75% excluded x 28% alt min tax rate). For taxpayers in the alternative minimum tax, this rate isn’t much better than the current unlimited long-term capital gains rate of 15% (but it may be better than the future long-term capital gains rate). Once the exclusion amount increases to 50%, the effective alternative minimum tax rate is 17.92%.

Therefore, if you are contemplating an investment in a company that is a qualified small business, it may be tax wise to try to complete the investment prior to January 1, 2011.

Good luck! If you need further information, please contact Michael Calahan at 312-980-2996 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.