Momentum - Business to Business Online Magazine MOMENTUM September 2019 | Page 16

TAXING MATTERS T. MARK RUSH, CPA Partner Ham, Langston & Brezina, LLP [email protected] 100 PERCENT Gain Exclusion Break (Tax-Free Capital Gains) D id you know that there is a way to sell a qualified small business corporation (QSBC) on a tax-free basis? Internal Revenue Code Section 1202 establishes the rules for the zero-tax bite. To get to zero, you need to operate your business as a tax code-defined QSBC. Now, add to this no-tax-on-sale benefit to the 21 percent corporate tax rate from the Tax Cuts and Jobs Act, and you have a significant tax planning opportunity. Imagine this: You sell your C corporation. The sale produces a $6 million capital gain to you. Your federal income tax bite on the $6 million of gain is zero. Yes, you are awake. You are reading this correctly. The tax bite is zero. You may already have a tax code-defined small business corporation, or you may be thinking of starting a new business as a small business corporation. Paying zero taxes on the sale of your business stock is a big incentive. To qualify for tax-free capital gains, you must acquire your QSBC stock after September 27, 2010 and hold your QSBC stock for more than five years to qualify for the tax-free treatment. To be eligible for the QSBC gain exclusion, the stock you acquire must meet the requirements set forth in Section 1202 of our beloved Internal Revenue Code. Those requirements include the following: • You generally must acquire the stock upon original issuance or through gift or inheritance. • You must acquire the stock in exchange for money, other property (not including stock), or services. • The corporation must be a QSBC at the date of the stock issuance and during substantially all the period you hold the stock. The corporation must be a domestic C corporation and must satisfy an active business requirement. That requirement is deemed satisfied if at least 80 percent (by value) of the corporation’s assets are used in the active conduct of a qualified business. Qualified businesses do not include • The performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any other business where the principal asset is the reputation 14 MOMENTUM or skill of one or more of its employees; • banking, insurance, leasing, financing, investing, or similar activities; • farming (including raising or harvesting timber); • production or extraction of oil, natural gas, or other natural resources for which percentage depletion deductions are allowed; or • the operation of a hotel, motel, restaurant, or similar business. The corporation’s gross assets cannot exceed $50 million before the stock is issued and immediately after the stock is issued (which considers amounts received for the stock). Lawmakers impose limits on your tax-free capital gains from the sale of a QSBC. In any taxable year, the tax limits on your eligible gain exclusion may not exceed the greater of • 10 times the aggregate adjusted basis in the QSBC stock you sell, or • $10 million reduced by the amount of eligible gains that you’ve already taken into account in prior tax years from sales of this QSBC stock ($5 million if you use married filing separate status). There are several other technicalities that need to be met to qualify for this tax free-sale, be sure to discuss with your tax adviser for more details.