Selling a Qualified Small Business? Consider Gain Exclusions
or Rollovers
Small business owners face a variety of challenges as they grow and operate their businesses.
The success of the business presents its own reward until it’s time to sell. The most successful owners
then find themselves facing a large tax bill if the proceeds are high compared to the original investment.
What if a small business owner could exclude some capital
The portion of gain would be subject to tax at the 28% capital
gains from tax upon sale? Better yet, what if a small business
gains rate if the taxpayer takes advantage of the Section 1202
owner could defer more capital gains tax by rolling proceeds
gains exclusion. Still, this leads to the following effective capital
into a new small business?
gains tax rates on QSB stock sales:
Owners of investment real estate and business property have
» 0% for QSB stock acquired after September 27, 2010 and taken advantage of this latter type of tax deferral for years by
before January 1, 2014;
conducting what is commonly known as a “1031 Exchange”.
» 7% for QSB stock acquired after February 17, 2009 and before September 28, 2010; and
Wouldn’t it be great if small business owners could attain the
» 14% for QSB stock acquired after August 10, 1993 and same result? In some cases, that’s entirely possible.
not otherwise within the two timeframes above.
Consider the 1202 Gains Exclusion
The Section 1202 gains exclusion is limited to the greater of
Congress created the Internal Revenue Code Section 1202
$10 million or 10 times the adjusted stock basis sold within a
gains exclusion in 1993, and it has evolved over time. In its
tax year. The portion of gain subject to tax is also subject to
current form, Section 1202 allows an owner of Qualified Small
the Alternative Minimum Tax; however, this only increases the
Business (“QSB”) stock to exclude some part (or all) capital gain
effective tax rates noted above slightly.
from income depending on when the QSB stock was issued.
What about the 1045 Rollover?
For this purpose, the taxpayer can exclude the following
What if a business owner would prefer to invest in another
percentage of gain from income:
qualified small business? In that event, the business owner
could benefit from a gain deferral as compared to the gain
» 100% for QSB stock acquired after September 27, exclusion discussed above.
2010 and before January 1, 2014;
For this purpose, Congress created the Internal Revenue Code
» 75% for QSB stock acquired after February 17, 2009 Section 1045 Rollover in 1997, and it has evolved over time to
and before September 28, 2010; and
» 50% for QSB stock acquired after August 10, 1993 and not otherwise within the two timeframes above.
provide capital gains deferral to taxpayers who sell their QSB
stock and invest in new QSB stock. In order to qualify for a
Section 1045 Rollover, a taxpayer must:
1. Be a qualified owner of QSB stock for at least 6 months
Certain types of business do not meet the definition of a
2. Reinvest proceeds from the sale of former QSB stock in qualified small business including those involved in:
new QSB stock
3. Execute the reinvestment within 60 days of the sale of the » Most service businesses based on reputation or skill of its preceding business.
owners;
» Farming, mineral extraction or production;
What is a Qualified Small Business (QSB)?
» Hotel, motel or restaurant operations;
In order to take advantage of the capital gains tax exclusion
» Banking or insurance; or
or deferral described above, the taxpayer must own stock in a
» Leasing, financing or investing.
Qualified Small Business. A Qualified Small Business is defined
as a domestic, subchapter C Corporation which:
As with any opportunities that promote tax benefits, careful
planning is necessary to attain the benefits provided by the
» Dedicates at least 80% of its assets toward its active underlying plan.
business
» Issued its stock after August 10, 1993 directly to the Conclusion
taxpayer
Small business owners will benefit greatly by working with
» Had gross assets that did not exceed $50 million when it appropriate professionals to weigh the costs and benefits of
issued its stock.
these tax exclusion and deferral opportunities. Keep in mind
that any business owner may sell a long-term business (including
In addition, the non-corporate taxpayer must have owned the
a qualified small business) and still qualify for the lower capital
QSB stock for at least 5 years (per Section 1202) and for at least
gains tax rates currently offered under the Taxpayer Relief Act
6 months (per Section 1045) to qualify for the corresponding
of 2012. This result should be compared to those offered above
exclusion or rollover deferral offered.
when conducting that analysis.
ABOUT THE AUTHOR
Terry LaBant is Vice President and Senior Wealth Strategist at Calamos Wealth Management. He has more
than 20 years of experience in the core areas of wealth creation and preservation. At Calamos Wealth
Management he provides guidance and planning assistance to individuals and business owners on matters
pertaining to tax, estates and retirement.
Sources: Internal Revenue Code Sections 1045 and 1202; Tina M. DeSanty, CPA, “Section 1202: Small
Business Stock Capital Gains Exclusion”, Tax Adviser, May 2013; Nick Gruidl and David Sterling, CPA, “Section
1202 Capital Gains Tax Exclusion, McGladrey, September 2013.
Opinions referenced are as of July 6, 2015 and are subject to change due to changes in the market, economic
conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass.
This discussion is intended to be informational only and is not exhaustive or conclusive. While Calamos
Wealth Management has used reasonable efforts to obtain information from reliable sources, we make
no representations or warranties as to the accuracy, reliability or completeness of third party information
presented herein. Calamos Wealth Management and its representatives do not provide tax or legal advice.
Each individual’s tax and financial situation is unique. You should consult your tax and/or legal advisor for
advice and information concerning your particular situation. This information is provided for informational
purposes only and should not be considered tax or legal advice.
For more information about federal and state taxes, please consult the Internal Revenue Service and the
appropriate state-level departments of revenue, respectively.
Calamos Wealth Management LLC is a federally registered investment advisor. Part II of Form ADV, which
provides background information about the firm and its business practices, is available upon written request
to:
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