IMPROVED TAX BREAKS FOR QSBS

Dear friends of RC Jones & Associates

The new economic stimulus law provides an added tax incentive for investing in fledgling corporations. It all has to do with two tax breaks for "qualified small business stock" (QSBS).

When you sell QSBS, you can exclude 75% of the gain from tax under the new law. Alternatively, an investor may roll over the sale proceeds tax-free into stock of the same company or another qualified small business. In fact, you may be able to combine the enhanced tax exclusion with the rollover for a big tax payoff.

Let’s quickly review both tax breaks.

Tax break No.1: Under prior law, you can exclude capital gains tax on up to 50% of the gain from the sale of QSBS if certain requirements are met. For starters, the investor must hold the stock for at least five years. Also, the stock must have been directly issued to the owner or given to him or her by someone who received the original shares.

The catch: The capital gains tax for QSBS is 28%. Because you're paying tax on half of the gain, the actual tax rate is 14% (50% of 28%) -- just 1% lower than the maximum capital gains rate.

Tax break No. 2: No current tax is due on a gain from selling QSBS if you roll over the proceeds into new shares of the same stock or other QSBS within 60 days. This tax break is available for QSBS held more than six months. If less than 100% of the proceeds are reinvested, you're taxed on gains up to the difference between the sales proceeds and the amount reinvested. The holding period for the new stock dates back to the purchase of the original stock.

Now the new tax law boosts the tax-free payoff at some future date. For sales of QSBS acquired after Feb. 17, 2009 and before Jan. 1, 2011, the tax exclusion increases from 50% to 75%. This lowers the effective tax bite to only 7% (25% of 28%)--less than half of the regular capital gains tax rate.

The optimal approach is to combine the two tax breaks for QSBS. If you're interested in more details, contact us at (816) 792-9966. One of our experienced tax professionals can explain all the intricacies.


Very truly yours,

Robert C Jones
www.RCJonesInc.com