DP Tool Club 12/CD_ASCQ_12_0294.iso/vrac/sba93_4b.zip/F410.SBE

Text File | 1993-11-01 | 8KB | 173 lines

        ┌───────────────────────────────────────────────┐
        │SPECIAL CAPITAL GAINS RELIEF FOR INVESTMENT IN │
        │              SMALL BUSINESS STOCK             │
        └───────────────────────────────────────────────┘

While individual tax rates are now as high as 39.6% (actual-
ly 3 to 4% higher in some cases, due to phase-outs of certain
exemptions and itemized deductions), the capital gains rate
remains at 28%, for long-term capital gains.  This makes the
gain on sale of a business, to the extent it is a capital
gain, considerably more attractive than "ordinary income"
that gets taxed at the higher individual rates.

Even more attractive, under the Revenue Reconciliation Act
of 1993, is the gain on certain "qualified small business
stock" held for over five years.  Unfortunately, such stock
is "qualified" only if it was issued after August 10, 1993,
so you won't be able to cash in on this tax incentive until
sometime in 1998, at the earliest.

Under this new tax incentive, 50% of the gain from the sale
of an investment in certain small business stock can be ex-
cluded from taxable income, if the stock meets certain re-
quirements when it is issued and if it is held for at least
five years.  Thus, in effect, the capital gain on such small
business stock would be taxed at only a 14% rate, theoretic-
ally, if the capital gains tax rate is still at 28% five
years from now.  (We say THEORETICALLY 14%, because 75% of
the total gain that is recognized is a "tax preference" item
under the alternative minimum tax, which may cause that tax
to apply, if it is greater than your "regular" income tax.
Since the alternative minimum tax is computed at rates of
26% and 28%, you are likely to pay significantly more than
a 14% rate if you have a large gain on "qualified small
business stock.")

A "qualified small business," for purposes of this tax bene-
fit, must meet all of the following requirements:

  . It must be a "C" corporation (other than a DISC, a regu-
    lated investment company, real estate investment trust,
    or certain other kinds of special corporate entities).

  . It cannot be an "S" corporation.

  . At least 80% of the corporation's assets must be used
    in the active conduct of one or more trades or businesses
    other than investing, farming, oil and gas, mining, bank-
    ing, insurance, financing, operation of a hotel, motel or
    restaurant, or provision of services where the principal
    asset of the business is the reputation or skill of one
    or more employees (such as in a law or CPA firm).  Cer-
    tain start-up, R & D and in-house research activities
    can qualify as "active conduct" of a business, as will
    assets used for working capital or temporary investments
    that are reasonably expected to be used in within two
    years to finance research and development activities.

  . As of the date the stock is issued, the corporation's
    gross assets (using adjusted tax basis, generally, for
    non-cash assets) must not exceed $50 million.

  . The stock must have been acquired directly from the
    corporation or through an underwriter, after August 10,
    1993, in exchange for cash, services, or property other
    than stock.

The amount of the gain that is eligible for the 50% exclusion
is limited to an amount equal to $10 million or ten times the
investor's basis (cost, usually) in the stock, whichever is
greater.

Note that such gain cannot be reduced by any capital losses
from other investments, unlike regular capital gains.


        ┌───────────────────────────────────────────────┐
        │ TAX BREAK FOR "SPECIALIZED SMALL BUSINESS IN- │
        │         VESTMENT COMPANIES ("SSBIC's")        │
        └───────────────────────────────────────────────┘

The 1993 Clinton tax package also provides for TAX-FREE
rollovers of gains on the sale of publicly traded securi-
ties, if the sales proceeds are used to buy common stock
in a "specialized small business investment company," or
SSBIC.  Such a "rollover" must be made within 60 days after
sale of the securities.

This tax break applies both to individuals and C corpora-
tions that roll over such gains, but not to S corporations,
estates, trusts or partnerships.

The maximum amount that can be rolled over in one tax year
is limited to the LESSER of $50,000, or $500,000 minus the
amount of such gains previously excluded, for individuals.
For corporations, the limit is the lesser of $250,000 or
$1 million reduced by such gains previously excluded.

An SSBIC is a partnership or corporation licensed as such
by the U.S. Small Business Administration.

Note that if you roll over gains into an SSBIC that is a C
corporation, you not only avoid current tax, but may also
qualify (when you later sell your stock in the SSBIC) for
the 50% exclusion for "qualified small business stock" that
is discussed above, if the SSBIC meets all the requirements.

@CODE: CA

        ┌───────────────────────────────────────────────┐
        │SPECIAL CAPITAL GAINS RELIEF FOR INVESTMENT IN │
        │ SMALL BUSINESS STOCK -- CALIFORNIA PROVISIONS │
        └───────────────────────────────────────────────┘

California has enacted "small business stock" incentives
similar to the federal incentives discussed above.  It also
applies to "qualified small business stock" (as defined for
California tax purposes) issued after August 10, 1993, but
such stock must also be issued before January 1, 1999.  Like
the federal provision, the new California law requires such
stock to be held for more than five years, and 50% of the
gain on such stock may be excluded from taxable income, with
certain limits -- a taxpayer can only exclude (cumulatively)
up to $10 million of gain ($5 million if married, filing
separate) from a single issuing corporation or, if greater,
an amount equal to 10 times the taxpayer's original tax
basis in the stock.

To qualify as "qualified small business stock," the stock
must be issued for money, property other than stock, or as
compensation for services (other than underwriting).  The
stock must be issued by a C corporation (not an S corpora-
tion) that is not a:

  . DISC or former DISC;

  . Regulated investment company (RIC);

  . Real estate investment trust (REIT); or

  . Real estate mortgage investment conduit (REMIC).

The issuing company must also meet several tests for its
stock to qualify for the California tax incentive:

  . It must meet an "active business" test (except for
    SSBICs, which are described above under the section
    of federal incentives);

  . It must be in a "qualified trade or business," which
    does not include health, law, engineering, consulting
    financial services, insurance, financing, leasing
    investing (or other kinds of personal services, gen-
    erally), farming, oil and gas extraction, or hotel/
    motel or restaurant businesses;

  . The corporation's gross assets must not exceed $50
    million at any time after June 30, 1993 and before
    or immediately after the issue date; and

  . The business must have at least 80% of the dollar
    value of its total payroll attributable to employment
    in California.

Only a non-corporate investor can claim the exclusion.  How-
ever, the stock can be owned by individuals, or by a pass-
through entity such as a partnership or S corporation, that
passes the eligible gain through to the individual owner
(who must also have been an owner in the partnership or the
S corporation when that entity bought the qualifying small
business stock).