If you are the founder or an employee of a technology, manufacturing, wholesale or retail company you may be able to exclude all or part the gain on sale of your company’s stock if you hold the stock for more than 5 years. The amount of the gain to be excluded depends on when the stock was issued.
Exclusion % If Stock was issued
50% After August 10, 1993 and before February 18, 2009.
75% After February 17, 2009 and before September 28, 2010.
100% After September 27, 2010 and before January 1, 2012.
For a stock to be considered qualified small business stock it must meet all of the following five conditions:
- The actual stock must be issued after August 10, 1993. Note that options to buy the stock are not considered stock for purposes of Section 1202.
- The stock must be acquired by purchase from the corporation or for the performance of services which means it cannot be acquired by gift or inheritance.
- The corporation must be an active business.
- The corporation cannot be involved in certain activities such as;
- One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services;
- One whose principal asset is the reputation or skill of one or more employees;
- Any banking, insurance, financing, leasing, investing, or similar business;
- Any farming business including the raising or harvesting of trees;
- Any business involving the production of products for which percentage depletion can be claimed; or
- Any business of operating a hotel, motel, restaurant, or similar business.
- The corporation’s gross assets before and after the issuance of stock cannot exceed $50 million.
Feel free to contact Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604 if you would like additional information on how to make the Section 1202 election.
