Family owned and small businesses can reduce taxes on stock sales from 14% to 20%. The 1997 Taxpayer Relief Act now permits founders of a company to reduce taxes and and potentially avoid tax on the sale of some types of stock if the proceeds are rolled over into another stock.
The Top Tax Rate Can be Reduced to 14%.
Upon sale, 50% of the gain is not subject to tax, The remaining 50% is subject to tax at a top rate of 28%. Therefore, the effective rate is lowered to 14%! The amount limited to such savings is $10 million or 10 times the cost basis of the stock. Please see IRC Section 1202.
Requirements for the Tax Break.
The following requirements must be met to qualify for the tax break:
- The owner must have held the stock for at least 5 years before sale.
- The company must have $50 million or less in gross assets on the day the stock is issued.
- The stock must be sold for money or property.
- The company must be in an active business other than investing, mining, or professional services (such as law, accounting or medicine.)
- The family owned or small business cannot own significant amounts of securites and real estate (10% of the assets.)
Postpone the Tax !.
The capital gains tax on the sale of stock can be posponed by a stock rollover. The requirements are:
- The stock must be held for more than 6 months.
- The proceeds must be rolled-over into other small business stock within 60 days.
- The time the old stock is held is tacked onto the new stock for purpose of sale.
How to make the Election.
The seller must report the gain on 1040 Schedule D (Capital Gains and Losses.) The seller then writes "Section 1045 rollover" on the return where the gain is reported.
