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Incentive to Invest (Now!) in C-Corporation Startups

The Small Business Jobs Act of 2010 became law on September 27, 2010.  The bill contains a wide array of provisions aimed at increasing access to capital and reducing tax burdens on small and startup businesses.  One provision in particular provides a tremendous incentive to invest in high impact startup companies while the calendar still reads “2010.” 

Section 1202 of the tax code has provided an incentive for long-term investors to purchase stock at issuance by C-Corporations with less than $50 million in assets.  If such stock is held more than five years, those investors traditionally enjoyed no capital gains tax on 50% of that stock when it was sold, subject to certain aggregate limitations.  The gain on the remaining half of the disposed stock was taxed at normal capital gains rates.  The American Recovery and Reinvestment Act of 2009 (commonly referred to as “the stimulus bill”) increased that exclusion to 75% of stock purchased in 2009 or 2010. 

The Small Business Jobs Act of 2010 now provides a limited window from now until the end of 2010 during which the purchase of any such stock will be completely excluded from capital gains tax upon its sale at least five years later, subject to the same aggregate limitations.  Anyone currently on the fence about investing in a promising young C-Corporation would do well to consider the enormous potential benefit of investing before the end of the calendar year.      

The Act contains a number of additional provisions applicable to all types of small businesses, whether a startup or established.  For a more complete summary of the Act’s tax provisions by the Joint Committee on Taxation, click here, or to view the bill itself, click here

Pursuant to the rules of professional conduct set forth in Treasury Department Circular 230, this communication was not written or intended to be used, and it cannot be used for, the purpose of avoiding federal tax penalties

©2020 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume , Number 285
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