A $10,000,000 Gain–Tax Free? Yes, if you have a C corp. and you hurry…

The prospect of pocketing $10 million tax-free is thrilling for plenty of business owners.  In fact, capital gains of up to $10 million from the sale of Qualified Small Business Stock (QSBS) can be excluded from income tax and alternative minimum tax under certain conditions.

What is a Qualified Small Business Company?

  • Must be a domestic C Corporation (this is a big disqualifier since we typically recommend our clients incorporate new businesses as an LLC)
  • No more than $50,000,000 of assets
  • At least 80% of the assets are used in the active conduct of business

Businesses that do not qualify for QSBS status:

  • Businesses that perform services in health, law, engineering, architecture, accounting, performing arts, consulting, athletics, financial services or brokerage
  • Businesses that have as their principal asset the reputation or skill of one or more employees
  • Any banking, insurance, financing, leasing, investing or similar business
  • Farming, mining or petroleum production
  • Hotels, motels, restaurant and similar businesses

There’s an important caveat to this attractive, potentially lucrative opportunity–to qualify for the 100% exclusion, the QSBS stock must be sold after September 27, 2010 and before January 1, 2012.

One of the considerations for this provision in the tax code was to reward and encourage entrepreneurs who bear the risk of starting new companies.  Of course, this provision will not apply to everyone.  However, for those of you that might be able to take advantage of this provision, time is of the essence.  Call your ShindelRock professional  to see how you can take advantage of this unusual tax-favored opportunity.