Fiscal Cliff Legislation Extends Tax Incentive to Invest in Small Businesses

As a result of the recent “fiscal cliff” legislation, otherwise known as the American Taxpayer Relief Act of 2012 (2012 Tax Act), many individual investors are expecting future tax increases, either in the form of higher capital gains tax on their investment profits or higher income taxes on their salaries. The good news though is that the 2012 Tax Act extended a special tax incentive for investors who purchase stock in certain small businesses (Qualified Small Businesses as described below).

The Qualified Small Businesses tax incentive now provides that investors who have purchased stock in Qualified Small Businesses after September 27, 2010 but before January 1, 2014 are entitled to exclude 100% of their capital gains on the sale or exchange of such small business stock if such stock is held for five years or more, subject to certain limitations on the small business and the investor’s gain as discussed below.

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