 Feature
Article
02-28-11
Did
you say an investment can result in $10 million in capital
gain and no tax!
By
Mitchell Kopelman
and Ori Epstein
>>
HA&W News Archive
Section
1202 of the Internal Revenue Code which was originally enacted
in 1993 remains one of the most overlooked code sections.
Recent changes to the section, by the Tax Relief, Unemployment
Insurance, Reauthorization, and Job Creation Act of 2010
make this section far too valuable to ignore.
Through
2008, Section 1202 allowed individual owners of qualified
small business stock to exclude from tax up to 50% of the
gain when they sold the stock. Beginning in 2009 until September
27, 2010, the exclusion increased to 75%. The most recent
legislation, signed in December 2010, increased the exclusion
to 100% for investments made from September 28, 2010 through
January 1, 2012. Additionally, prior to the December 2010
legislation there was an additional alternative minimum
tax of 7% assessed on the excluded gain. This additional
tax is waived for investments made through January 1, 2012.
For
an investment to qualify for these benefits, the following
rules apply regarding the character of the stock and the
holding period:
-
Shares must be issued by a C Corporation whose assets
before and after the issuance did not exceed $50,000,000.
-
Shares must be issued to an individual or entity other
than a C Corporation. Corporations that own stock in another
Corporation do not qualify for the exclusion.
-
Shares must be acquired by the taxpayer at their original
issue date.
-
Shares must be held by the taxpayer for more than five
years.
Additionally,
the 100% exclusion is limited to the greater of $10,000,000
of gain on a per issuer basis or 10 times the basis of the
stock in the taxpayer’s hand.
There
are no special reporting requirements for the corporation
that issues the stock or the investor. Taxpayers elect the
exclusion on their tax return when the shares are sold.
Section
1202 exclusion is especially attractive to venture capital
funds, private equity funds, and individual investors, who
have invested since September 28, 2010 and/or plan to invest
into a C Corporation by January 1, 2012. This exclusion
will bolster the after-tax return on investments.
Finally,
companies organized as LLCs who are considering converting
to C Corporations could find this exclusion invaluable.
LLC unit holders could convert their interests in the LLC
to shares of stock in a newly formed corporation and be
eligible for the provisions of Section 1202 on future gains.
The
investment can be made directly by an individual or by an
investment vehicle, such as a Venture Capital or Private
Equity Firm, entities typically taxed as Partnerships. The
nature of the gain, if held for five years, will be passed
through to the individual owner of the Partnership, and
the exclusion is elected at the individual taxpayer level.
Although
available for only a short window of time, Section 1202
exclusion can provide exceptional tax benefits for the investors
willing to hold an asset at least five years that is acquired
between September 27, 2010 and January 1, 2012.
If you
would like some specific guidance on this matter or other
matters, please feel free to contact us.
>>
HA&W News Archive |
