Small Business Jobs Act

President Obama signed the Small Business Jobs Act of 2010 into law. One of the incentives created by the law effectively eliminates capital gains tax on certain investments in qualified small business stock that are made before the end of 2010. This incentive may help a number of companies to close investment deals before year-end.

Under the Act, the capital gains from investments made between September 27, 2010 and January 1, 2011 in qualified small business stock are generally not subject to taxation. The total amount of the capital gains that are eligible for exclusion is capped at the greater of $10 million or 10 times the taxpayer’s basis in the stock. The Act also eliminates the alternative minimum tax (AMT) preference for qualified investments, further improving the potential tax benefits to investors who are subject to AMT.

What investments qualify for the Section 1202 tax incentives?

In order to qualify for the limited capital gains tax exclusion for an investment made during the remaining months of 2010, an investment must be made in an entity that qualifies as: C corporation that meets certain active business requirements--no pass-through entities, such as LLCs, S corporations, or partnerships; “qualified small business,” which means that it must have less than $50 million in assets (parents and their majority-owned subsidiaries are treated as one entity for purposes of the exclusion); and  “qualified trade or business,” which excludes (among others) banking, insurance, financing, leasing, investing, farming, and hotel businesses, and a variety of service businesses (such as those in health, law, consulting, financial services, etc., or any other trade or business where the principal asset of such trade or business is the reputation or skill of its employees).