Contributed by Elizabeth Sigety

The newly signed Small Business Jobs Act of 2010 provides a 100 percent exemption for gains made in Qualified Small Business Stock . This means that an investor who makes an investment between September 27 and December 31, 2010 and meets the criteria below will pay no taxes on gains from the investment and the Alternative Minimum Tax does not apply.

So, if you are starting a franchised business that is a C-corporation, is not a restaurant or hotel and meets the other criteria below, you, as an investor in your new corporation, and fellow investors in your corporation, can get a significant tax break. Caution – be sure to study the criteria and talk to your accountant to be sure you qualify for this opportunity!!! Also, measure this tax advantage with the more immediate potential tax advantages of forming a limited liability company.

Criteria and Limitations:

• Investments must be made by a non-corporate investor (for example, individuals or funds structured as LLCs).
• Investments must be made between September 27 and December 31, 2010 to qualify for no taxes on the gains and not to be subject to the Alternative Minimum Tax.
• 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. (Again, we caution that you should reivew any such moves with 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

For more information on the Act and this proposal, please go to section 1202 of the Federal Tax Code. You may also want to review the following resources: 

·         Wall Street Journal – For New Tax Breaks, Act Fast , September 30, 2010

·         Overall summary of other items in the Small Business Jobs Acts