100% Exclusion for Qualified Small Business Stock To Be Extended

Big news: On December 16, 2014, the Senate passed H.R. 5771, the Tax Increase Prevention Act of 2014. The bill now goes to the President. He is expected to sign it.

The bill would do a variety of things, but from a startup perspective one important thing it would do is renew the 100% exclusion from tax for gain on qualified small business stock received from qualifying C corporations during the calendar year 2014.

Qualified Small Business Stock

The 100% exclusion expired at the end of 2013. This bill renews the 100% exclusion for stock issued by qualifying C corporations issued before the end of 2014.

Thus, if:

  1. You received founder shares in a C corporation in 2014, or
  2. You invested in shares of a C corporation in 2014, and
  3. You hold those shares for 5 years,
  4. You may be able to exclude up to $10M in gain from the sale of those shares.
  5. There are a variety of other limitations that apply to the Section 1202 qualified small business stock benefit. For example, the corporation issuing the shares has to, among other things, be a “qualified small business,” have less than $50M in gross assets, have an active business, and be engaged in a qualified trade or business.

The Text of the Extension

1202

This 100% exclusion affects your choice of entity considerations significantly. Only C corporations can issue qualified small business stock. Thus, if you form an S corporation, your founder shares cannot qualify for the 100% exclusion.

The Cap on the Benefit

The 100% is not uncapped, but you can exclude up to $10M under Section 1202.

limitation

In Conclusion

This extension is good news for the startup world.

Incorporation, Where To Incorporate: Delaware or Washington?

I’ve created a Hackpad on the question of where a startup should incorporate.

Incorporation State

The great thing about a Hackpad is that you the reader can suggest edits to it, embed questions, and so on. If you have any questions or comment about the analysis in the Hackpad, please suggest edits or ask questions.

The Hackpad on Where to Incorporate