The Protecting Americans From Tax Hikes Act of 2015 (the "PATH Act"), expected to be soon passed by Congress and signed into law by President Obama, permanently extends the 100% exclusion for gain recognized on the sale of Qualified Small Business Stock ("QSBS").
Historically, investors that sold QSBS held for the requisite five-year holding period were permitted to exclude 50% of the gain recognized on such sale when computing their federal income tax liability. This percentage was increased to 75% for stock purchased in 2009 and 2010, and then to 100% for QSBS purchases made after September 27, 2010 and before January 1, 2015 (prior to passage of the PATH Act).
Many requirements must be met in order for an investor to qualify for the favorable gain exclusion rule, many of which are within the control of the issuer of the stock. For example, the issuer of the stock must be a domestic C corporation, must use at least 80% of its assets in a qualified trade or business (excludes certain service businesses), cannot make significant redemptions during a two-year period starting one year before the investment, and cannot at any time after August 10, 1993 have held gross assets in excess of $50 million. In addition, the investor must be an individual or non-corporate entity and generally must hold the QSBS for five years.