Angel Insights Blog
Monday, December 22, 2014
Angels: 100% Exclusion of Gains Now Law for 2014 Investments
By: Marianne Hudson, ACA Executive Director
Last week, President Obama signed the Tax Increase Prevention Act, which includes several benefits for small businesses and also a benefit for angel investors. We want to get this information out to you, as this benefit relates to investments made in 2014 (retroactively and through December 31).
The new law includes a 100 percent exemption for gains made in Qualified Small Business Stock (also known as “Section 1202”) and this new law effectively means that you pay no taxes on gains from your investments that meet several criteria below and Alternative Minimum Tax does not apply. If you are interested in this program, PLEASE TALK TO YOUR ACCOUNTANT to ensure you have all the information you need to structure your investments to meet all requirements.
Criteria and Limitations:
- Investments must be made by a non-corporate investor (for example, individuals or funds structured as LLCs).
- Investments must be made in 2014. There have been a variety of different levels of tax exclusions since 2010, from 50% to 100%. A listing of the dates and percentages is here.
- The company in which you invest must be a C corporation and must be a qualifying type of business (many businesses except financial institutions, farms, professional service firms, hotels, and restaurants)
- The company in which you invest must not exceed $50 million in aggregate gross assets at any time before the investment or immediately afterward. An important issue in this size is that 80% of the assets must be used in the “active conduct” of the business at all times.
- The stock must be purchased by the investor as an original issuance from the corporation, directly or through an underwriter. So, notes and warrants do not count. We’re hearing that if you have an outstanding note that converts to stock before December 31st, then the stock would count for this program. (BUT TALK TO YOUR ACCOUNTANT.)
- The stock must be held for more than five years (subject to exemptions for qualifying tax-free rollovers)
- There are limitations on redeeming shares of the company’s stock before and after the qualified stock is issued.
- The gains eligible for the zero taxes by any single taxpayer max out at $10 million or ten times the adjusted tax basis of stock issued by the stock
- The gains are also not subject to the Alternative Minimum Tax.
ACA will continue to work on making this program permanent or at least extend it for a meaningful period of time, and incorporate some improvements, such as reducing the holding period and making investments in LLCs qualify. Special tip of the cap go to the bi-partisan team of Rep. Lynn Jenkins (R-KS) and Rep. Ron Kind (D-WI) for ensuring that the 100% exclusion was included in the bill, and also to our government affairs team including Chris McCannell of APCO Worldwide.
For more information, check out these articles:
- Tax Tips Every Angel Investor Should Know
- Obama Signs 2014 Tax Extenders: Money in Your Pocket
- Calling All Angels – Donald Jay Korn, Financial Planning Magazine, September, 2009 (This was written when the exemptions for QSBS were only 50 to 75%, but has helpful information, and includes one of the last media quotes from Luis Villalobos.)
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Comments
Thanks to everyone involved in helping to make these tax changes happen
Kevin Moore 9 years ago
Thank you ACA for working on this tax exclusion to continue!
Tatyana Gray 9 years ago
