The Zero Tax rate Extension for Alaska 1202 qualified small business stock in 2012 and 2013 is Running Out
The American Taxpayer Relief Act of 2012 (the Act), Congress extended the Zero Tax rate on the sale of qualified small business stock (Section 1202 Stock). This marks the second time the special provisions were extended. Section 1202 of the Internal Revenue Code – that individual taxpayers that receive gain on selling their qualified small business stock acquired after September 27, 2010, and before January 1, 2014, after they have held it for five years or more, can exclude it from their income for federal tax purposes.
The excluded gain under this temporary provision is not a nonpreference item under the alternative minimum tax (AMT) provisions. The gain exclusion in 2010 and later
extended the special treatment to qualified small business stock acquired in 2011, but it did not provide for such treatment with respect to stock purchased in 2012. The latest Act both extends favorable tax treatment for such stock acquired in 2013 and retroactively applies such tax treatment to such stock acquired in 2012.
As usual there is no certanty that Congress will extend the 100% gain exclusion on small business stock acquired after 2013. If you have a business idea in the works you should get it done before year end if you want to cash in on the Zero tax bonanza.
Gain Exclusion Limits
The gain exclusion is available only C corporations, S corps and the unbiquitous LLC don’t get the Zero Tax. If your C Corpration is under $50 million at initial capitalization you can qualify. You will need to begin operations and actively engage in productive activities. You can’t engage in a host of activities including banking, farming, natural resource extraction/production, or certain service businesses like consulting, engineering, or leasing activities.
The cap on the Zero Tax gain is the greater of (i) 10 times your stock basis or (ii) $10 million. The Zero Tax applies only for people not other corporations. Gain over the cap is taxed at regular capital gains rates and the new 3.8% Medicare tax for capital gains starting in 2013. Since gain below the threshold is not included in computing taxable income, the gain is not a part of “net investment income,” which is subject to the new 3.8% Medicare tax.
It is also possible that half the eligible gain on the sale of qualified small business stock purchased outside the Zero Tax Rules window is excluded from the taxpayer’s income. In addition, some of the excluded gain is ordinarily treated as an AMT preference item and is added back into the taxpayer’s AMT income, which further reduces the benefit of the exclusion.
Opportunities
The gain exclusion for qualified small business stock under the Act should be addressed in choice-of-entity decisions. In Alaska pass-through entities are the knee jerk choice of entity. Alaska historically taxed C Corporations but not the Sub S or LLC entities. Alaska however also passed legislation exempting 1202 qualified corporations from Alaska State Corporation income tax so long as the corporation is either incorporated in Alaska or is authorized to do business in this Alaska.
Lots of people a for most start-up businesses for several reasons, including they can do it themselves on the state web site. Their CPA does it for them to avoid attorneys fees. Their buddy has an LLC and they want to be like everyone else. To discuss if the Zero Tax business entity is right for you call us at 907-375-9277.