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Investing in qualified small business stock

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in Small Business Tax,Small Business Tax Deduction Strategies

The tax law contains a break for investing in qualified small business stock (QSBS). If certain requirements are met (e.g., the stock must be held five years), you can exclude (pay no tax on) up to 50% of the gain. The capital gains tax rate for QSBS is 28%, so the effective tax rate is 14% (50% of 28%).

Now the new economic stimulus law sweetens the deal.

Strategy: Include QSBS in your portfolio. For sales of QSBS acquired after Feb. 17, 2009, and before Jan. 1, 2011, the gain exclusion increases from 50% to 75%. This lowers the effective tax bite to only 7% (25% of 28%)—less than half of the regular 15% capital gains tax rate (this assumes you’re not subject to the AMT).

Furthermore, no current tax is due on a gain from selling QSBS if you roll over the proceeds into new shares of the same stock or other QSBS within 60 days. The rollover tax break is available for QSBS held more than six months.

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