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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Special Situations

Sale of Qualified Business Stock

Tax laws encourage investments in small businesses by offering unique tax incentives. If you own stock in a corporation treated as a small business, you may be able to defer your gain or exclude it entirely.

Small business
For purposes of deferring or excluding gain on the sale of stock, a small business is a C corporation with gross assets of no more than $50 million when the stock is issued. The small business must be an active business and not a mere holding company. The stock must have been issued after August 10,1993.

There are many conditions surrounding this exclusion:

  • It applies only to stock issued by a small business after August 10, 1993.
  • As of the date the stock was issued, the corporation was a qualified small business (see definition).
  • The company must be a C corporation (not an S corporation).
  • You must have acquired the stock at its original issue, either in exchange for money or other property, or as pay for services.
  • During substantially all of the time you held the stock:
    • The corporation was a C corporation.
    • At least 80% of the value of the corporation’s assets were used in the active conduct of 1 or more qualified businesses.
    • The corporation was engaged in any business other than: 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 ...

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