We recently posted an article on our website that provides guidance on how to do business in California. While working with our clients to decide what legal structure best suits their business needs, we would be remiss to mention the tax savings available to investors in a C corporation.
Thanks to the recent “fiscal cliff” legislation passed by Congress, individual investors who purchase stock in certain small businesses (as described below) can continue to realize tax free capital gains on their investment.
The Qualified Small Businesses tax incentive now provides that investors who have purchased stock in Qualified Small Businesses after September 27, 2010 but before January 1, 2014 are entitled to exclude 100% of their capital gains on the sale or exchange of such small business stock when the stock is held for five years or more.
Generally, to be a Qualified Small Business, the business must meet the all of the following criteria:
- be a domestic C-corporation;
- 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
- use more than 80% of its assets in the active conduct of a qualified trade or business during the time the taxpayer holds such stock.
The maximum gain an investor can exclude pursuant to this incentive is the greater of (a) 10 times the taxpayer’s basis in the stock, and (b) $10,000,000, minus the gain taken in prior years in connection with the same Qualified Small Business.
Given the potential tax free savings on capital gains, investors and entrepreneurs should keep this incentive in mind when considering their legal and tax strategies and investment opportunities for 2013.
As a joint law and CPA firm, at Gedeon Law & CPA we work with investors to analyze their legal and tax options when recommending the best entity structure.