Investing in Small Businesses

If your stock meets certain requirements at the time of issue and it has been held for at least five years, you can exclude from tax a percentage of your gain from the sale of the stock. Under a provision of the Small Business Jobs Act of 2010, this exclusion is raised from 50% to 100% for stock purchased after September 27, 2010. In addition, the excluded gain is not subject to the AMT. Under the American Taxpayer Relief Act of 2012, this 100% exclusion and the preferred AMT treatment were extended. The Tax Increase Prevention Act of 2014 further extended this 100% exclusion to qualified small business stocks acquired in 2014 and the Protecting Americans from Tax Hikes Act of 2015 (PATH) permanently extends the exclusion of 100% of gain. For the purposes of this provision, a small business is defined as a company with assets of less than $50 million that conducts an active trade or business.

You may defer gain on the sale of publicly traded stock if you reinvest in a "specialized small business investment company." Normally, your individual deduction for net capital losses cannot exceed $3,000 each year. However, Section 1244 stock, a category created to encourage investment in small businesses, allows investors to deduct ordinary losses up to $50,000 ($100,000 for a married couple filing jointly).

The stock of most new businesses with no more than $1 million of initial capitalization will be accorded Section 1244 status. However, only the original owners of Section 1244 stock qualify to receive ordinary loss treatment. Check with us to determine if your small business losses qualify for ordinary loss treatment.