2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

QUALIFIED SMALL BUSINESS STOCK AFTER TAX REFORM

The Tax Cuts and Jobs Act (TCJA) reduced the corporate tax rate to 21%. This change has led many to speculate that C corporations are poised for a resurgence. A C corporation is a legal structure whereby the owners (or shareholders) are taxed separately from their businesses. C corporation stock may constitute qualified small business stock under the tax law (Internal Revenue Code Section 1202), which could allow all or part of the gain on the sale of such stock to be excluded from income. To qualify for the gain exclusion, the following requirements must be met: 1. C corporation requirement: On the date of issuance, the issuing corporation must be a domestic C corporation, and the stock must be an original issuance after August 10, 1993. 2. Qualified small business (QSB) requirement: At all times before and immediately after the date of issuance, the aggregate gross assets of the corporation must not exceed $50 million. For purposes of Section 1202, the adjusted basis of any property contributed to the corporation is equal to its fair market value (FMV) on the date of contribution. 3. Original issuance requirement: The stock must be acquired directly from the issuing corporation in exchange for money or property or as compensation for services provided to the corporation. Stock acquired from an existing shareholder does not qualify. Stock acquired through the exercise of options or warrants or through the conversion of convertible debt may be treated as acquired at original issuance. 4. Active business requirement: The corporation must be an "eligible corporation," and at least 80% (by value) of the assets of the corporation must be used by the corporation in the active conduct of one or more "qualified trades or businesses."

v Eligible corporation: An eligible corporation means any domestic corporation other than a Domestic International Sales Corporation (DISC or former DISC), a regulated investment company, real estate investment trust, real estate mortgage investment conduit (REMIC), or a cooperative. v Qualified trades or businesses: A qualified business means any trade or business other than: A) Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of its employees; B) Any banking, insurance, financing, leasing, investing, or similar business; C) Any farming business (including the business of raising or harvesting trees); D) Any business involving the production or extraction of products of a character for which a deduction is allowable under Sec. 613 (percentage depletion of mines, wells, and other natural deposits) or 613A (percentage depletion of oil and gas wells); and E) Any business operating a hotel, motel, restaurant, or similar business. QSB stock acquired after August 10, 1993, and before February 18, 2009, is eligible for a 50% gain exclusion. The exclusion is increased to 75% for QSB stock acquired after February 18, 2009, through September 27, 2010, and to 100% for QSB stock issued on or after September 28, 2010.

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