New Tax Incentive for Long-Term Equity Investments Essay

1140 Words Oct 28th, 2014 5 Pages

There has been a great deal of public discussion about the increased individual and corporate income tax rates and general harsh treatment of upper income taxpayers under the Omnibus Budget Reconciliation Act of 1993. However. there has been scant attention to what may, in fact, prove to be a silver lining in that tax cloud - the newly authorized capital gains exclusion for the stock of certain companies. Under the Act. non-corporate holders of stock in "qualified small businesses" can escape tax on up to one-half of any gain from the sale of that stock which they have held for at least five years.

1. Qualified Small Businesses

The new tax benefit is only
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Stock in corporations engaged in banking, insurance, leasing, financing. investing or farming, or any business operating a hotel, motel. restaurant. or similar business is not eligible for this special tax benefit.

C. Maximum Gross Assets: The Issuer's gross assets. i.e.. cash plus the adjusted basis for its other property, cannot be more than $50 million. If an Issuer satisfies the $50 million test on the issuance date but goes over that level in the future. stock that

otherwise qualifies as small business stock will not be disqualified merely because of the subsequent change in asset value. However. an Issuer that exceeds the $50 million threshold at any time after August 10. 1993. cannot again issue stock qualifying for the exclusion. An issuer generally cannot own real property not used in its trade or business with a value in excess of 10% of its total assets. or portfolio stock or securities with a value of more than 10% of its total assets in excess of its liabilities.

2. Eligible Stock The stock must be acquired after August 10. 1993 by direct purchase from the Issuer. or from an underwriter, in exchange for money, other property (not including stock). or as compensation for services performed for the corporation (other than services performed as an underwriter of the stock). The exclusion will not be available if the Issuer:

a) Buys back any stock from the stockholder or a related

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