A special tax incentive for investments in small businesses is set to expire on December 31, 2011. Under current law, investors who purchase stock in certain small businesses (Qualified Small Businesses) on or before December 31, 2011 are entitled to exclude 100% of their capital gains on the sale of such small business stock if such stock is held for five years or more, subject to certain limitations as discussed below. This incentive was initially set forth in the Small Business Jobs and Credit Act of 2010 for stock purchased between September 27, 2010 and December 31, 2010, but was extended through December 31, 2011 pursuant to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (signed into law on December 17, 2010).

Generally, to take advantage of this incentive, the small business must (a) be a domestic C- corporation; (b) have gross assets not in excess of $50,000,000 (at all times since August 10, 1993 as well as immediately after the issuance of the stock); and (c) use more than 80% of its assets in the active conduct of a trade or business (though certain businesses in the legal, banking, insurance, investing, farming and hospitality industries are excluded) during the time the taxpayer holds such stock.

The maximum gain an investor can exclude pursuant to this incentive (with respect to a particular corporation) is the greater of (a) ten times the taxpayer’s basis in the stock, and (b) $10,000,000.

Therefore, there is significant tax incentive to complete your potential investments in Qualified Small Businesses prior to year end!