How The Qualified Small Business Stock Exclusion Can Benefit Business Owners When Selling

Tax Relief Opportunities & Requirements For Selling Under Section 1202

When it comes to selling a business, it is essential to consider how the capital gains from the sale will affect your taxes. How much is taken out will depend on whether it is a stock sale or an asset sale. For stock sales, as the selling investor, you will likely be required to pay capital gains tax.

If you’re selling your business stock, it is possible that you qualify for the Qualified Small Business Stock Exclusion which can significantly impact how much taxes you will owe. Your tax attorneys in Scottsdale can help you understand if your sale will be impacted by significant capital gains taxes or if it qualifies under the exclusion.

What Is The Qualified Small Business Stock Sale Exclusion?

The Qualified Small Business Stock exclusion is a tax benefit for eligible shareholders of a qualified small business. It allows those shareholders to sell their stock and only have to pay a percentage of the capital gains tax, or in some cases, be excluded from paying any capital gains tax! However, not all small business stocks are eligible.

The IRS implemented this exclusion to encourage individuals to invest in small businesses. Starting a small business can be risky, but the risk is beneficial to individuals as well as the economy and the government wanted to make it easier for investors to do so.

Qualified Small Business Eligibility Rules

If you are a shareholder in a small business, you may wonder if you are able to take advantage of this tax benefit. While it is possible that you are eligible, your tax attorneys in Arizona will advise you on the following considerations:

• The business only qualifies if it is a C corporation.
• The business must not have had more than $50 million in gross assets when the stock was issued.
• The business must be actively operating.
• At least 80% of the business’s assets must be used in qualified business (certain service-type businesses are excluded).
• The stock must have been acquired directly from the business, not from another investor.
• You must hold the stock for at least 5 years before qualifying.
• The stock must have been acquired after August 10, 1993.

Qualified Small Business Stock Sale Exclusion Tax Amounts

Each shareholder will be able to benefit from the tax exclusion in differing amounts depending on when you acquired the stock and how much capital gains you will receive on the sale.

• 100% Exclusion: For those that purchased the Qualified Small Business Stock on or after September 27, 2010.
• 75% Exclusion: For those that purchased between February 18, 2009 and September 27, 2010.
• 50% Exclusion: For those that purchased between August 10, 1993 and February 17, 2009.

In addition to when you bought the stock, the amount you can exclude is limited to two options and you are able to choose the greater of the two.

• You can either exclude up to $10 million of the gain, regardless of how much the initial investment was OR
• 10 times what you originally paid for the stock.

Taxes & The Portion Of The Qualified Small Business Stock Sale That Is Not Excluded

So what happens to the remaining percentage if you did not qualify for 100% exclusion? The remaining portion that is not excluded will be subject to the going capital gains tax rate.

You will likely be paying either 15% or 20% based on your income. If you have an exceptionally high income, you may also have to pay an additional 3.8% Net Investment Income Tax. The tax attorneys in Arizona from Silver Law can help you determine how the capital gains tax will affect you based on the percentage you owe on and your income.

How The Qualified Small Business Stock Sale Exclusion Works In Arizona

Some states do not follow the same federal rules on Qualified Small Business Stock Sales and Arizona is one of them. This means that you may be excluded from paying capital gains tax federally, but required to pay state taxes on them.

The good news is Arizona allows a tax break on capital gains of 25% so you will only owe taxes on 75% of the gain. Arizona’s income tax is between 2.59% and 4.50% depending on your income, so even though they do not follow the same rules on Qualified Small Business Stock Sales, you will likely still get a tax break.

Ensure You Are Able To Get The Tax Break You Deserve By Hiring Our Qualified Tax Attorneys!

If you’re looking into selling your small business stock, reach out to our team of qualified tax attorneys in Arizona to see if you qualify for the Qualified Small Business Stock Sale Exclusion! At Silver Law, we have the experience necessary to navigate the complexities of tax law and we take great pride in our work. We will do everything we can to ensure the best outcome in your sale of small business stock.

Contact us today and discover why our tax attorneys are the best in the business

Email: lchapman@silverlawplc.com
Website: taxcontroversy.com

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