Start-up Firms

About Start-up Firms:

companies for which investors who hold qualified small business stock for at least 5 years may exclude 50% of the gains realized on the disposition of their stock. A qualified small business is a C corporation with less than $25 million of aggregate capitalization from January 1, 1993, through the date on which the taxpayer acquires stock in the corporation, that uses substantially all of its assets in the active conduct of a trade or business during substantially all of the taxpayer's holding period. Firms engaged in certain activities, including personal service, banking, leasing, real estate, farming, mineral extraction, and hospitality, cannot be qualified small businesses. Qualified small business stock must be acquired directly by an individual taxpayer (or indirectly by an individual taxpayer through an investment partnership or other passthrough entity) after December 31, 1992, and at its original issue price (either directly from the corporation or through an underwriter). A C corporation that holds stock in a qualified small business does not qualify for the exclusion.

Individuals may exclude 50% of capital gains realized upon the disposition of qualified small business stock held over 5 years, and they apply their current statutory rate on capital gains (either 15% or 28%) to the reduced amount of taxable gain. Gain eligible for the exclusion is limited to the greater of ten times the investor's basis in the stock or $1 million for each qualified small business. One-half of any exclusion claimed is treated as a tax preference item under the individual alternative minimum tax. IRC §1044.

See also Capital Gain in the American Legal Encyclopedia and Capital Gain in the World Legal Encyclopedia.