Tax-Conscious Investor Looks into QSB Stock
Emily has always enjoyed keeping her portfolio balanced and reading up on what’s hot in the investment world. As year end nears, however, her enthusiasm tends to change to concern — namely about what her tax bill may look like. So, as she does every year, Emily recently paid a visit to her financial advisor to discuss the latest capital gains rules.
Her advisor, as always, commended Emily for being so diligent about looking into the tax impact of her investments. Knowing that she’d long held an interest in investing in small businesses, he had a particularly interesting bit of tax planning news to share.
QSB STock- An exclusion of note
Emily’s advisor began by explaining that a tax break is available that applies to the sale of qualified small business (QSB) stock. (Under the tax code, a QSB is defined as, among other things, one engaged in an active trade or business that doesn’t — at the time the stock is acquired — have assets exceeding $50 million. Other limitations apply.)
From past experience, Emily knew she could usually exclude up to 50% of her capital gain from the sale of QSB stock as long as she’d held it for more than five years. But this usually resulted in only a slight tax savings over other long-term capital gains because a 28% rate applied to the taxable portion of QSB stock gains.
Her advisor complimented her knowledge but remarked that this is where the interesting news comes in. For QSB stock acquired after Sept. 27, 2010, and before Jan. 1, 2012, Emily would be able to exclude 100% of her gain. (For stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, there’s a 75% exclusion rate.) She still would be required to hold the stock for more than five years, and additional requirements apply.
Greater good
Emily’s advisor emphasized that Emily must buy the QSB stock by Dec. 31, 2011, to garner the future 100% gain exclusion — unless Congress extends the break.
Plus, there’s a potentially greater good that could come from this type of investment. One of the reasons lawmakers created the exclusion was to encourage investment in small businesses. The hope is that, as these companies have an easier time raising capital, the economy as a whole will benefit.
More to discuss
Of course, Emily’s investment-related tax planning didn’t end here. Although she was grateful to her advisor for raising her awareness of the 100% exclusion, she knew there were many other valuable strategies that the two could discuss as well.
Please contact Feeley & Driscoll's Boston Accounting team by Email or call us at 1 (888) 875-9770.
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