QSBS Tax Incentives Extended . . . For Now - Venture Capital and Early Stage and Emerging Companies Alert

by McCarter & English, LLP
Contact

What happened?
In the wee hours of December 16th, Congress passed H.R. 5771, the Tax Increase Prevention Act of 2014 (“TIPA”), a stopgap measure that, among other things, retroactively extends certain tax incentives that expired on December 31, 2013. President Obama signed the bill into law on December 19th. Of particular relevance for start-up and early-stage enterprises, TIPA reinstates the 100% gain exclusion from the sale of certain qualified small business stock held for more than five years . . . but only for stock which is acquired before January 1, 2015, and which meets other requirements. Congress is expected to continue debate over a longer-term extension for this particular tax incentive in the coming year.

What is QSBS?
Qualified small business stock (“QSBS”) is defined as capital stock of a domestic C corporation that operates an active business satisfying various requirements set forth in the Internal Revenue Code (the “Code”). The rules are extremely technical and must be reviewed carefully on a case-by-case basis. Of particular importance, the corporation must use at least 80% of its asset value in the active conduct of one or more “qualified trades or businesses” (as defined in the Code), and its “aggregate gross assets” cannot exceed $50 million immediately after the stock is issued. Many companies in the new and emerging technology sector are potentially eligible to issue QSBS.

By 2010, as part of an overall economic stimulus plan put in place in response to the Great Recession and the near collapse of our financial system, the Code’s preexisting exclusion of gains on sales of QSBS held for more than five years had been increased, first from 50% to 75% and then from 75% to 100%, with the applicable percentage depending upon when the stock was acquired. Prior to the enactment of TIPA, the 100% exclusion was scheduled to “sunset” for QSBS acquired after December 31, 2013, meaning that any QSBS acquired during calendar year 2014 or thereafter – if held for the requisite five-year holding period – would have been eligible only for the original exclusion amount of 50%.

Now, however, as a result of TIPA, the sunset date for expiration of the 100% gain exclusion has been extended until December 31, 2014. The lesser gain exclusions (50% and 75%) continue to apply to QSBS acquired during certain time periods, and the percentage exclusion is now scheduled to revert from 100% to 50% for QSBS acquired on and after January 1, 2015.

It is important to note that in all scenarios – whether the exclusion amount is 50%, 75% or 100% – the exclusion is available only for noncorporate taxpayers who hold QSBS for more than five years, and there is a “cap” on the exclusion for each eligible corporation essentially equal to the greater of $10 million or 10 times the basis of the stock sold. In addition, in order to be treated as QSBS, the stock generally must be acquired by the taxpayer at its original issue (directly or through an underwriter); for example, stock purchased from a preexisting shareholder is not eligible. Whether the exclusion will be available for state or local income tax purposes will depend on each jurisdiction’s particular tax laws.

Related provisions of the Code also allow noncorporate taxpayers who acquire and hold QSBS for more than six months to elect to defer realized gain upon the sale of the QSBS by reinvesting the sale proceeds, within 60 days, into new QSBS. The taxpayer’s basis in the new QSBS is reduced by the amount of deferred gain. These deferral provisions were not affected by TIPA.

What does this mean?
QSBS tax incentives provide an attractive motivation for (i) investors to acquire stock in qualifying ventures and (ii) entrepreneurs to consider organizing their ventures as C corporations in the first instance. While QSBS tax treatment may be a factor in the initial choice of entity determination, the determination requires weighing a multitude of facts and circumstances (both tax and non-tax). Those of us in the start-up, early-stage and venture capital community are pleased that Congress extended favorable QSBS tax treatment for stock acquired through the end of 2014 and hope that Congress sees fit to extend such treatment into 2015 and beyond. We feel strongly, and there is substantial anecdotal evidence from our emerging growth and venture capital clients, that QSBS tax incentives stimulate the start-up ecosystem by motivating entrepreneurial activity, innovation and investment in early-stage enterprises.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McCarter & English, LLP | Attorney Advertising

Written by:

McCarter & English, LLP
Contact
more
less

McCarter & English, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.