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Bar Association of San Francisco Member Benefits: Publications

Stock That Is 100% Excludable From Capital Gain


By David B. Porter, Wood & Porter


The Small Business Jobs Act of 2010, passed in early 2010, increased to 100 percent the exclusion for gain on the sale of certain qualified small business stock. Although this was highly attractive, the stock purchase had to be made between September 27, 2010, and December 31, 2010, so time was very short.

However, just before the end of 2010, the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended this deadline through December 31, 2011. You can now purchase newly issued stock in a qualified small business in 2011, and if you hold it for five years, will pay no federal income tax upon sale. Furthermore, the alternative minimum tax (AMT) will not impact this 100 percent exclusion.

This is creating a stir among investors and small companies seeking funding.Several words of caution:
First, California has not increased its exclusion which remains at 50 percent.

Second, the federal statute (IRC §1202) includes many requirements. The stock must be of a C corporation with gross assets of $50 million or less at the time of issuance. For substantially all of the time the taxpayer holds the stock, the corporation must be engaged in a qualifying trade or business (excluding banking; farming; natural resources; services in health, law, engineering, etc.; operating a hotel, restaurant, etc.). There are also special rules for holding qualified small business stock through a partnership.

The law is complicated, but the potential tax savings are enormous for issuances through 2011. You can now buy newly issued stock in a qualified small business in 2011 and, provided that you hold it for five years, you won’t pay any federal income tax when you sell.


Dave Porter is a partner with Wood & Porter in San Francisco. He concentrates in civil and criminal tax controversies and litigation. He can be reached at

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