By investing in qualified small business (QSB) stock, you can diversify your portfolio and enjoy two valuable tax benefits:
1. Tax-free gain
rollovers. If within 60 days of selling QSB stock you
buy other QSB stock with the proceeds, you can defer the tax on your gain until
you dispose of the new stock. The rolled-over gain reduces your basis in the
new stock. For determining long-term capital gains treatment, the new stock’s
holding period includes the holding period of the stock you sold.
2. Exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude up to 50%
of their gain if they’ve held the stock for more than five years. But, depending
on the acquisition date, the exclusion may be greater: The exclusion is 75% for
stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100% for
stock acquired on or after Sept. 28, 2010. The acquisition deadline for the
100% gain exclusion had been Dec. 31, 2014, but Congress has made this
exclusion permanent.
The taxable portion of any QSB gain will be
subject to the lesser of your ordinary-income rate or 28%, rather than the
normal long-term gains rate. Thus, if the 28% rate and the 50% exclusion apply,
the effective rate on the QSB gain will be 14% (28% × 50%).
Keep in mind that these tax benefits are
subject to additional requirements and limits. For example, to be a QSB, a
business must be engaged in an active trade or business and must not have
assets that exceed $50 million.
