Good news from a tax planning perspective as we head into the new year.  The Protecting Americans from Tax Hikes (PATH) Act of 2015, which was enacted into law on December 18, 2015, retroactively extends certain provisions of the Internal Revenue Code (IRC) that had previously expired.  Of particular interest to our readers, the PATH Act permanently extends the 100% capital gains exclusion for “qualified small business stock” (also referred to as QSBS) initially acquired after September 27, 2010.

As a quick refresher, the QSBS tax exemption was originally enacted to incentivize investment in “qualified small businesses” by providing (non-corporate) investors the opportunity to exclude all or a portion of their gains from Federal capital gains tax in certain circumstances.  The QSBS exclusion is codified in IRC § 1202.  A “qualified small business” is generally defined by the IRS as a domestic C corporation that is engaged in an active trade or business and has gross assets that do not exceed $50 million (measured at the time the qualified stock is initially purchased).   In order to qualify for the tax exemption, the investor must hold the qualified stock for at least five years from the initial date of purchase.  In addition, the timing of an investor’s initial purchase of the qualified stock will impact the amount excluded from Federal capital gains tax that may later apply when the stock is ultimately sold, according to the following percentages:

  • 50% exclusion: a holder of qualifying stock acquired after August 10, 1993 and on or before February 17, 2009 may be eligible for a 50% exclusion from Federal capital gains tax (if the stock is held for more than five years).
  • 75% exclusion: a holder of qualifying stock acquired after February 17, 2009 and on or before September 27, 2010 may be eligible for a 75% exclusion from Federal capital gains tax (if the stock is held for more than five years).
  • 100% exclusion: a holder of qualifying stock acquired after September 27, 2010 (this is retroactive for 2015) may be eligible for a 100% exclusion from Federal capital gains tax (if the stock is held for more than five years).

If you are interested in more detail, here is the full text of the PATH Act.