THE PATH TO A PERMANENT SEC. 1202 SMALL … 1 THE PATH TO A PERMANENT SEC. 1202 SMALL BUSINESS STOCK CAPITAL GAINS EXCLUSION June 7, 2016 Rick Klahsen, CPA Partner BKD, LLP [email protected]

6/6/2016

1

THE PATH TO A PERMANENT SEC. 1202 SMALL BUSINESS STOCK CAPITAL GAINS EXCLUSION

June 7, 2016

Rick Klahsen, CPAPartner

BKD, [email protected]

Chris WaltersSenior Director

Small Business Investor Alliance (SBIA)[email protected]

6/6/2016

2

• Participate in entire webinar• Answer polls when they are provided• If you are viewing this webinar in a group

Complete group attendance form with• Title & date of live webinar• Your company name• Your printed name, signature & email address

All group attendance sheets must be submitted to [email protected] within 24 hours of live webinar Answer polls when they are provided

• If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days of live webinar

TO RECEIVE CPE CREDIT

• Today’s agenda A brief history of Sec. 1202 Process for securing legislation for a

permanent Sec. 1202 Qualification & technical requirements

for exclusion Other small business stock tax

incentives

THE PATH TO A PERMANENT SEC. 1202

6/6/2016

3

• Tax deferred rollover of gain from qualified small business stockSec. 1045

• Significant exclusion of gainSec. 1202

• Favorable treatment of lossesSec. 1244

SMALL BUSINESS STOCK TAX INCENTIVES

• Revenue Reconciliation Act of 1993 created Sec. 1202 50% exclusion from income on sale or exchange of

qualifying stock• Stock acquired after August 10, 1993, to February 17, 2009

75% exclusion from income• Stock acquired after February 17, 2009, & before September 28,

2010 100% exclusion from income

• Stock acquired after September 27, 2010, & before January 1, 2014 50% exclusion from income

• Stock acquired after January 1, 2014

SEC. 1202 – A BRIEF HISTORY LESSON

6/6/2016

4

• 100% exclusion retroactively reinstated 2014 Tax Increase Prevention Act Effective for stock acquired during 2014

• 2015 PATH Act changes Enacted December 18, 2015 Retroactively restored 100% gain exclusion Effective for stock acquired after 2014 Made 100% exclusion permanent

SEC. 1202 – A BRIEF HISTORY LESSON

• Making 1202 provision permanent was a major priority for SBIA Opportunities

• Congress was interested in helping small business after 2008 financial crisis• Small business is number one job creator in U.S. (2/3 of jobs created)

Threats• Permanency adds to budget cost estimate (Joint Committee on Taxation)• Congressman Dave Camp (repealed this provision in his tax reform plan)• Targeted tax breaks became unpopular with rise of Tea Party

SECURING PERMANENT SEC 1202 LEGISLATION

6/6/2016

5

• SBIA action plan to pass this into law Tell story about how this provision incentivizes investment in small

business• Wrote comments to tax reform working groups during 113th Congress• Included provision in SBIA 114th Congress agenda

Meet with members on Senate Finance & House Ways and Means Committees Pushed for strong bipartisan advocates

• Senators Maria Cantwell (D-WA), Mary Landrieu (D-LA), Ben Cardin (D-MD), Jerry Moran (R-KS), Pat Toomey (R-PA)

SECURING PERMANENT SEC 1202 LEGISLATION

• Package of tax provisions included in 2015 Omnibus legislation Congress was incentivized to pass major permanency bill of all business

provision New leadership eager to come to an agreement

• Paul Ryan became new Speaker of the House & wanted to start off with a bang• Paul Ryan & President Obama previously worked to negotiate budget

resolutions & the sequester (mandatory spending limits)

Business provisions expired each year• Congress did not want to go through annual extenders bill

SECURING PERMANENT SEC 1202 LEGISLATION

6/6/2016

6

Allows for exclusion from income for gain realized from sale of “qualified small business stock” (QSBS)

BASICS OF SEC. 1202

Domestic C corporations

Qualified Small Business

Holding period requirement

Noncorporate shareholders

Cap on excludible gain

Gain in excess of exclusion taxed at

special capital gains rate

Nonelective

• Qualified Small Business Stock Issued by a domestic C corp Active business requirement Limited real estate holdings Qualifies as a “small” business

• Aggregate gross asset test

Stock acquired at original issue• Issued after August 10, 1993

BASICS OF SEC. 1202

6/6/2016

7

• Active trade or business requirement 80% asset/qualified business test “Eligible” corporation Limited real estate holdings

BASICS OF SEC. 1202

• Active trade or business 80% or more (by value) of assets are used in active conduct of a qualified trade or

business Excludes service-related businesses whose principal asset is reputation or skill of

one or more employees• Performance of services in fields of health, law, engineering, architecture, accounting, etc.

Other excluded businesses• Banking, insurance, financing, leasing, investing or similar businesses• Farming businesses• Mineral extraction businesses including oil & gas• Hotels, motels, restaurants or similar businesses

Includes, for example• Manufacturing• Wholesale• Retail trades• Transportation activities

BASICS OF SEC. 1202

6/6/2016

8

• Active trade or business requirement• “Eligible” corporation

Any domestic C corp, except• DISC or former DISC• Sec. 936 possessions tax credit corporations• RIC, REIT or REMIC• Cooperatives

BASICS OF SEC. 1202

• Limited real estate holdings No more than 10% of total value of assets consists of real estate not

used in active conduct of a qualified trade or business Ownership of, dealing in, or rental of real property is not qualified trade

or business activity

BASICS OF SEC. 1202

6/6/2016

9

Qualified “Small” Business

BASICS OF SEC. 1202

• Aggregate gross assets did not exceed $50 million At all times after August 10, 1993, & before issuance of stock

• Aggregate gross assets immediately after issuance not in excess of $50 million

• Aggregate gross assets = cash & adjusted basis of other property

• Contributed property Adjusted basis equals fair market value as of contribution date

• Shareholder considerations Gain exclusion available to noncorporate

shareholders Must be acquired as original issue stock

• In exchange for money or other property, but not for stock; or

• As compensation• Stock acquired via gift or bequest can qualify• Stock acquired via conversion of stock in same

QSBS corp qualifies Must be held for more than five years from

original issue date Exclusion is not elective

BASICS OF SEC. 1202

6/6/2016

10

• Shareholder considerations Excludible gain is “capped” at greater of $10

million or 10 times adjusted basis of stock• If married taxpayers file separate returns, limit is $5

million per spouse• Limit applies to stock of each QSBS corporation• $10 million limit is reduced by taxpayer’s aggregate

prior year gains from stock of same issuer

Potential deferral of gain under Sec. 1045

BASICS OF SEC. 1202

• Gains from QSBS stock held more than six months (but less than five years) may be rolled over under Sec. 1045

• Rollover of gain is elective, not mandatory• Replacement QSBS stock must be purchased within 60 days beginning on date

of sale• “Replacement” QSBS is stock of any qualifying QSBS• Election must be made by due date (including extensions) of income tax

return for tax year in which stock was sold• Election is made on Schedule D, Form 1040 (per instructions to Sch. D)

GAIN ROLLOVER UNDER SEC. 1045

6/6/2016

11

LOSS ON SALE – RELIEF UNDER SEC. 1244

• Qualifying shareholders are individual (own stock directly or through a partnership)

• Stock must be original issue, issued for money or property• Issued by domestic small business corporation• Maximum annual amount that can be treated as an ordinary loss under Sec.

1244 $50,000 - $100,000 limit for joint returns Aggregate limit, regardless of whether stock is issued by one or more corporations

• C corps are generally not “tax efficient” Corporate level tax Distributions taxed again as dividends

• Special rules apply if issuing corporation purchased (redeemed) any of its stock form the shareholder or a related person

• Net Investment Tax does not apply to excluded Sec. 1202 gain• Gain from Sec. 1202 is also excluded from AMT

SEC. 1202 – OTHER CONSIDERATIONS

6/6/2016

12

CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org.

The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars.

6/6/2016

13

• CPE credit may be awarded upon verification of participant attendance

• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at [email protected]

CPE CREDIT

Rick Klahsen | 972.702.8262 | [email protected]

Chris Walters | 202.628.5055 | [email protected]

6/6/2016

14