Opportunity for Small Business Owners to Sell Their
February 2017 Edition
Knox Capital Advisors, LLC (“Knox”) specializes in Business Succession and Exit Planning, which we define as the deliberate, thoughtful, and systematic process that integrates planning for the business with the personal planning of the owners so as to: (1) Maximize the enterprise value of the business in anticipation of a sale or transfer, and (2) Optimize after-tax proceeds in fulfillment of the owners’ objectives and legacy.
Opportunity for Small Business Owners to Sell Their Stock with up to 100% Capital Gain Exclusion History of Section 1202 Internal Revenue Code Section 1202 was first put in place as part of the Omnibus Budget Reconciliation Act of 1993. At that time, Congress allowed for a 50% gain exclusion for certain qualified small business stock (QSBS) to incentivize U.S. noncorporate taxpayers to invest in domestic corporate vehicles. In 2010, The Small Business Jobs Act amended Section 1202 rules relative to QSBS providing for a potential 100% exclusion. Most recently, Section 126 of the Consolidated Appropriations Act in 2016 made the 100% exclusion permanent provided requirements are met. Consequently, under current laws there is the potential for exclusion of gain subject to limitation (see below) on the sale of QSBS stock for regular income tax, alternative minimum tax, and the 3.8% net investment income tax. In the state of Utah, this gain would also be excluded for state income tax purposes. These recent changes present a great opportunity for the small business owner to take advantage of the exclusion rule when selling QSBS. The total benefit that can be gained by using Section 1202 rules is limited to the greater of $10 million per taxpayer or 10 times the adjusted basis of the investment. It is believed that there are many stock dispositions occurring that qualify for this benefit that are not taking advantage of it.
Qualifications to be Eligible for the Tax Exclusion In order for Qualified Small Business Stock to qualify for an exclusion, these criteria must generally be met: Stock must have been directly acquired via an original issuance from a U.S. C corporation. The issued stock must have been issued after August 10, 1993. Before and immediately after stock issuance, the C corporation’s tax basis in gross assets did not exceed $50 million. The C corporation and shareholders must consent to supply documentation regarding QSBS. The C corporation conducts certain active trades or businesses. The stock must have been held for more than 5 years. The investor must be a noncorporate taxpayer.
13961 S. Minuteman Drive, Suite 300 Salt Lake City, UT 84020 Tel: 801.984.8000
Fax: 801.984.8008
Investment Advisory Services provided through Knox Capital Advisors LLC. Insurance services provided by Knox Capital Insurance LLC.
Conclusion A significant benefit may be available for noncorporate business owners that sell C corporation stock that meets the qualifications under Section 1202. When planning the structure of a sale of a business, consideration should be given to this tax strategy, where the business and taxpayer meet the necessary requirements.
Author Stanley Kimball Leland Stanford McCullough IV [email protected]
The information contained in this article is general in nature and is not legal, tax or financial advice. Investment Services offered through Knox Capital Advisors LLC. Insurance Services offered through Knox Capital Insurance LLC. Investing in equities can result in loss of principle. Past performance does not guarantee future results. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
13961 S. Minuteman Drive, Suite 300 Salt Lake City, UT 84020 Tel: 801.984.8000
Fax: 801.984.8008
Investment Advisory Services provided through Knox Capital Advisors LLC. Insurance services provided by Knox Capital Insurance LLC.
Knox Capital Advisors, LLC (“Knox”) specializes in Business Succession and Exit Planning, which we define as the deliberate, thoughtful, and systematic process that integrates planning for the business with the personal planning of the owners so as to: (1) Maximize the enterprise value of the business in anticipation of a sale or transfer, and (2) Optimize after-tax proceeds in fulfillment of the owners’ objectives and legacy.
Opportunity for Small Business Owners to Sell Their Stock with up to 100% Capital Gain Exclusion History of Section 1202 Internal Revenue Code Section 1202 was first put in place as part of the Omnibus Budget Reconciliation Act of 1993. At that time, Congress allowed for a 50% gain exclusion for certain qualified small business stock (QSBS) to incentivize U.S. noncorporate taxpayers to invest in domestic corporate vehicles. In 2010, The Small Business Jobs Act amended Section 1202 rules relative to QSBS providing for a potential 100% exclusion. Most recently, Section 126 of the Consolidated Appropriations Act in 2016 made the 100% exclusion permanent provided requirements are met. Consequently, under current laws there is the potential for exclusion of gain subject to limitation (see below) on the sale of QSBS stock for regular income tax, alternative minimum tax, and the 3.8% net investment income tax. In the state of Utah, this gain would also be excluded for state income tax purposes. These recent changes present a great opportunity for the small business owner to take advantage of the exclusion rule when selling QSBS. The total benefit that can be gained by using Section 1202 rules is limited to the greater of $10 million per taxpayer or 10 times the adjusted basis of the investment. It is believed that there are many stock dispositions occurring that qualify for this benefit that are not taking advantage of it.
Qualifications to be Eligible for the Tax Exclusion In order for Qualified Small Business Stock to qualify for an exclusion, these criteria must generally be met: Stock must have been directly acquired via an original issuance from a U.S. C corporation. The issued stock must have been issued after August 10, 1993. Before and immediately after stock issuance, the C corporation’s tax basis in gross assets did not exceed $50 million. The C corporation and shareholders must consent to supply documentation regarding QSBS. The C corporation conducts certain active trades or businesses. The stock must have been held for more than 5 years. The investor must be a noncorporate taxpayer.
13961 S. Minuteman Drive, Suite 300 Salt Lake City, UT 84020 Tel: 801.984.8000
Fax: 801.984.8008
Investment Advisory Services provided through Knox Capital Advisors LLC. Insurance services provided by Knox Capital Insurance LLC.
Conclusion A significant benefit may be available for noncorporate business owners that sell C corporation stock that meets the qualifications under Section 1202. When planning the structure of a sale of a business, consideration should be given to this tax strategy, where the business and taxpayer meet the necessary requirements.
Author Stanley Kimball Leland Stanford McCullough IV [email protected]
The information contained in this article is general in nature and is not legal, tax or financial advice. Investment Services offered through Knox Capital Advisors LLC. Insurance Services offered through Knox Capital Insurance LLC. Investing in equities can result in loss of principle. Past performance does not guarantee future results. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
13961 S. Minuteman Drive, Suite 300 Salt Lake City, UT 84020 Tel: 801.984.8000
Fax: 801.984.8008
Investment Advisory Services provided through Knox Capital Advisors LLC. Insurance services provided by Knox Capital Insurance LLC.
