Thanksgiving marks the beginning of the busiest consumer buying period of the year in the U.S. This year, however, investors may want to consider spending more time shopping for stock than stuff. The New Year will bring an increase of 14% in the federal tax rate for many investments – up from a rate of 0% for qualifying investments made on or before December 31, 2010 (yes, that means no federal tax).
And the holiday cheer offered by this potential tax benefit is not limited to outside investors. Others who may want to consider a change in their end-of-year financial plans include:
- Entrepreneurs – if you were thinking about forming a company or contributing additional capital to your new business at the beginning of 2011, you may want to accelerate your plans.
- Option/warrant holders – if you hold vested options/warrants, you may want to evaluate an early exercise of your rights.
- LLC members – have you been considering a change in form of entity? Conversion to a corporate form before the end of the year could qualify the stock you receive for tax free treatment on capital gains.
Under the Small Business Jobs Act of 2010 (signed into law on September 27th by President Obama), there is a 100% exclusion from federal tax for any capital gains realized from certain investments in “qualified small business stock” made between September 27, 2010 and December 31, 2010. The excluded capital gain for qualifying investments is also excluded for purposes of the alternative minimum tax. On January 1, 2011, the capital gains rate applicable to qualified small business stock will return to 14%, and gains will no longer be excluded for alternative minimum tax purposes.
Section 1202 of the Internal Revenue Code includes a number of requirements and limitations for this tax benefit, some of which are summarized below. As the list below is not exhaustive, you should review the details of any proposed investment with an attorney or tax adviser to ensure that it qualifies.
- The issuer must be a C corporation.
- The stock must be acquired at original issuance from the issuer (not from a third party or secondary offering).
- The stock must be held for at least five years.
- The aggregate gross assets of the issuer (including majority parents and majority-owned subsidiaries) may not exceed $50 million at issuance.
- The issuer must engage in the active conduct of a “qualified trade or business.” Examples of businesses that do not qualify include: banking, insurance, financing, leasing, investing, farming, mineral extraction, hospitality businesses, and a variety of service businesses where the principal asset of such trade or business is the reputation or skill of its employees (such as those in health, law, consulting, and financial services).
We at Campbell Law Group would be happy to help you evaluate whether or how you might be able to take advantage of this extraordinary opportunity. In particular, feel free to contact me or Jochem Tans.
This content is provided solely for general informational purposes. It does not constitute legal advice regarding any specific facts and circumstances, and its dissemination does not create an attorney-client relationship. If you are interested in learning more or want to discuss a particular situation, you should contact one of us or another attorney or tax adviser.