Individuals who are preparing to invest — before the end of 2011 — in a corporation having assets worth less than $50 million should carefully consider an opportunity created by the Small Business Jobs Act of 2010 (enacted September 27, 2010) and extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Job Creation Act”) (enacted December 17, 2010).
The Small Business Jobs Act of 2010 makes it possible, in certain circumstances, to sell stock at a gain up to $10 million (or, if greater, 10 times the taxpayer’s initial tax basis in such stock) and pay 0 percent federal income tax. Gains which are eligible for this special treatment will be completely exempt from both the regular federal income tax and the alternative minimum tax. The Job Creation Act extended the time period for acquiring qualifying stock by an additional year.
This extraordinary opportunity, as extended by the Job Creation Act, is available only to noncorporate taxpayers investing in “qualified small business stock” issued by a C corporation to the taxpayer after September 27, 2010 and before January 1, 2012, and only if the taxpayer holds such stock for at least five years.
In order for stock in a C corporation to be treated as “qualified small business stock,” at least 80 percent of the C corporation’s assets must be used by the C corporation (during substantially all the time the taxpayer holds the stock) in the active conduct of trade or business excluding farming; hotel, motel or restaurant business; banking; insurance; financing; leasing; investing; health; law; engineering; architecture; accounting; actuarial science; performing arts; consulting; athletics; financial or brokerage services; or any other trade or business where the principal asset is the reputation or skill of one or more employees. The stock must be issued by the C corporation to the taxpayer in exchange for money or other property (generally not including stock) or as compensation for services provided to the C corporation. From August 10, 1993 until immediately after the issuance of such stock, the assets of the C corporation must have been worth less than $50 million.