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What is qualified small business stock? If you're running a small business, you might want to take notice of this concept. Especially since in some cases, it's tax free.
First off, let's point out that qualified small business stock is a tax concept. It comes from the tax code (section 1202, to be exact).
The rule is this: If a taxpayer recognizes gain from the sale or exchange of "qualified small business (QSB) stock," then a huge portion of that gain may be excluded from the gross income of that taxpayer, for income tax purposes.
In fact, after the recent fiscal cliff legislation, 100% of the gain from the sale of the stock can potentially be excluded from income tax, for QSB stock acquired between September 28, 2010, and January 1, 2014. And what's better is that the Alternative Minimum Tax doesn't apply, so those gains are essentially tax-free. This is a huge deal for startups, as FF Venture Capital noted in its blog.
But not every business can be a "qualified small business." There are many limitations. Similarly, even if you have a qualified small business, your stock might not be "qualified small business stock."
It's tax law, so it's full of nuances and details. Here are just a few:
Qualified small business stock can provide a huge write-off. If you're starting a company and hope to see it funded, consider talking to an experienced business attorney about QSB stock.
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