2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

Qualified Small Business Stock

Moving into its third year, the Tax Cuts and Jobs Act (TCJA) of 2017 remains relevant in terms of entity structure. One of the significant changes included in the TCJA was the reduction in the C corporation income tax rate to 21%, making the C corporation form of entity potentially more beneficial for business owners. In addition to the lower income tax rate, C Corporation stock can potentially qualify as qualified small business stock (QSBS) under Internal Revenue Code Section 1202. Under this section, part or even all of the gain from the sale of QSBS can be excluded from income. There are specific requirements to qualify for this gain exclusion, including: X The stock must be issued by a domestic C Corporation after August 10, 1993. X The corporation must be a qualified small business with gross assets of $50 million or less at all times before and immediately after the date of issuance.

Service businesses such as health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of its employees; Banking, insurance, financing, leasing, investing, or similar businesses;

X

X

Farming businesses;

X

Businesses involving the production or extraction of products, such as mines, wells, and other natural deposits; and

X

X Hotels, motels, restaurants, or similar businesses. The amount of gain that can potentially be excluded from income depends on the acquisition date and holding period. QSBS acquired between August 9, 1993, and February 17, 2009, is eligible for a 50% exclusion, increasing to 75% for stock acquired between February 18, 2009, and September 27, 2010, and 100% for QSBS issued on or after September 28, 2010. To qualify for any exclusion, the stock must be held for a minimum of five years. The amount of gain ultimately excluded is subject to the greater of two limitations-- a cumulative limitation and an annual limitation:

Cumulative Limitation – $10 million reduced by the aggregate amount of any prior Section 1202 gain. Annual Limitation – 10 times the aggregate adjusted basis of QSBS sold during the year.

X

The stock must be original issued stock rather than acquired from an existing shareholder.

X

X

X The corporation must be an active business, with at least 80% of the assets used by the corporation to conduct a qualified trade or business. Qualified trades or businesses do not include: