PC Computing: Best Free Software/ZDCD.iso/apps/fin/smalb.exe/F410.SBE

Text File | 1997-09-23 | 9.3 KB | 210 lines

@190 CHAP ZZ

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

While individual tax rates are now as high as 39.6% (actually
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
excluded from taxable income, if the stock meets certain
requirements 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,
theoretically, if the capital gains tax rate is still at 28%
in 1998 and later.  (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
benefit, must meet all of the following requirements:

  . It must be a "C" corporation (other than a DISC, a
    regulated 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,
    banking, 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).  Certain 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.  Also,
the amount of such gain that is taxable cannot qualify for
the new reduced capital gains tax rate of 20%, only for the
28% maximum rate, so that the effective tax rate remains
half of 28%, or 14%, on small business stock.

However, the new 1997 tax law did add another important
feature regarding small business stock:  the sale of such
stock before the 5-year holding period requirement is
satisfied will be nontaxable if the seller "rolls over"
the gain by reinvesting within 60 days in the stock of
another qualified small business.  In addition, the
holding period for the stock sold can be added to the
holding period of the newly-purchased stock, and counted
towards the 5-year holding period requirement.


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

The 1993 Clinton tax package also provides for TAX-FREE
rollovers of gains on the sale of publicly traded securities,
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
corporations 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.  They were
formerly designated as Minority Enterprise Small Business
Investment Companies ("MESBICs").  If you are interested
in "rolling over" gains on publicly traded stocks or bonds
into stock of an SSBIC, you can obtain from the Small
Business Administration its Directory of Operating Small
Business Investment Companies, which identifies over 100
SSBICs in some different states, the District of Columbia
and Puerto Rico.

        ┌───────────────────────────────────────────────┐
        │To obtain the directory listing SSBICs, send   │
        │ your name and address to:                     │
        │                                               │
        │    Associate Administrator for Investment     │
        │    Small Business Administration              │
        │    Washington, DC 20416                       │
        │                                               │
        │Telephone: [phone]   FAX: [phone]│
        └───────────────────────────────────────────────┘

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
corporation) 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,
    generally), 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.
However, 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).