One silver lining to the American Taxpayer Relief Act of 2012 (“ATRA”) is that it extended the 100% exclusion for capital gain on qualified small business stock (“QSBS”) acquired between 2010 and 2011 to include stock purchased in 2012 and 2013. It also eliminated the alternative minimum tax (“AMT”) that might otherwise apply to gain on QSBS acquired between 2010 and 2013 and mitigated the AMT effect for shares purchased in other years. These changes can allow certain taxpayers to recognize up to $10 million in tax-free gain. In the face of the many increases in tax rates enacted under ATRA, the extension of the 100% QSBS exclusion and the permanent mitigation of the applicable AMT rules provides significant relief to noncorporate taxpayers who invest in businesses with assets of $50 million or less.

Taxpayers who purchased QSBS in September 2010 or later will not be eligible to realize the benefit of the 100% gain exclusion until September 2015 at the earliest. Nonetheless, the changes made by Congress under ATRA are relevant now both for taxpayers who are making decisions about whether to invest in small businesses as well as entrepreneurs who are making decisions about what type of entity to form in starting a new business. Additionally, taxpayers who acquired QSBS in 2012, before ATRA retroactively extended the 100% exclusion to stock acquired in 2012, may be entitled to QSBS benefits when they sell their shares in 2017 or later, and should not overlook the potential benefits available.