Is it true that there is no tax on the sale of my business?

Section 1202 of the Internal Revenue Code (IRC) allows the selling owner of a business to exclude up to $10 million of gains from income/capital gains tax.

What’s the catch?

No catch, but there are a few rules. The law became permanent at the end of 2015 and asserts that sellers may exclude from taxable income a portion of the gain realized on the sale of their “qualified small business stock.” Also, the seller must hold the stock for more than five years.

This exclusion is limited, on a “per issuer” basis to the greater of $10 million or ten times the basis in the stock. You must, however, add back part of the excluded gain as a preference for alternative minimum tax purposes.

“Qualified small business stock,” means any stock in a domestic (US) corporation if:

  • The corporation is a “qualified small business” at the time of stock issuance; and
  • You acquired the stock after September 27, 2010 at its original issue in exchange for money, other property (not including stock), or as compensation for services provided to the corporation, so called “Sweat Equity.”

 

A “qualified small business” is a domestic C corporation with up to $50 million in gross assets at all times before the stock issuance. The corporation must be an “active business” rather than simply an investment company. For example, dealing in or rental of real property is not considered the active conduct of a qualified trade or business.

Founders take note

Various restrictions, limitations and technical rules apply but this new tax provision can be a boon to new companies as well as old companies that issue additional stock after September 27, 2010.

 

For more information, please feel free to contact us at the coordinates below.

800 Third Avenue, New York, NY 10022  |  info@rooneynimmo.com  |  Tel 212 545 8022

 

This article is one of a series intended to de-mystify common legal issues for the non-lawyer and entrepreneur audience – they are designed to foster discussion and is by no means exhaustive. These materials are for informational purposes only. Nothing herein is intended nor should be regarded as legal advice. The distribution of this article to any person does not establish an attorney-client relationship with our firm. Rooney Nimmo assumes no liability in connection with the use of this publication. This bulletin is considered attorney advertising under the applicable rules of New York State. Rooney Nimmo UK is regulated by the Law Society of Scotland and Rooney Nimmo US by the New York Rules of Professional Conduct. All Attorneys and Solicitors listed in this firm stipulate their jurisdictional limitations. Rooney Nimmo in the USA is a law firm registered as a New York State Professional Corporation.

Is it true that there is no tax on the sale of my business? 1

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