Hedge your bets with a startup company. Size often matters in the corporate world. Strategy: Issue Section 1244 stock if your company qualifies as a "small corporation." With Section 1244 stock, you can take up to a $50,000 loss ($100,000 on a joint return) to offset highly taxed ordinary income instead of low-taxed capital gain. In the usual case, your losses must offset capital gains first and then only up to $3,000 of ordinary income. Tip: To qualify as a small corporation for this purpose, the total capital invested in the company at the time of the stock issue can't exceed $1 million. Other technical requirements apply, so see your tax pro.
Squeeze through a small company loophole. It's bad enough that business owners worry about corporate income tax. But your company may also face alternative minimum tax (AMT) complications. Strategy: If your business qualifies as a "small corporation," it will be exempt from the corporate AMT. For this purpose, a small corporation is one whose gross receipts for the three previous tax years averaged less than $7.5 million (or that had less than $7.5 million in receipts in its first year). If it's a close call, use installment sales to pull your business below the threshold. Tip: The $7.5 million threshold is reduced to $5 million for the corporation's initial three-year period.
Sidestep tax on qualified stock sales. Investors in qualified "small business" stock held more than five years can exclude 50 percent of the sale's gain. But a 28 percent capital gains tax rate continues to apply to such sales—even after last year's reduction of the maximum capital gains rate to 15 percent. That means you'll earn just a 1 percent advantage—14 percent to 15 percent—for sales of small business stock. Strategy: Roll over the sale proceeds into other qualified small business stock. You'll pay no tax at all on the rollover if you hold the stock for six months prior to the sale and the rollover is completed within 60 days of the sale. Note: This tax break often enables a small business owner to attract new investors to the company.
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