This WSGR Alert serves as a reminder to our clients and friends that investors who acquire qualified small business stock (QSBS) before January 1, 2012, may receive a substantial tax benefit as a result of changes to the tax laws made by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Act) that are scheduled to expire at the end of this year. Entrepreneurs and investors considering forming or making investments in qualifying corporations, including owners of unincorporated businesses considering incorporation and holders of convertible debt in qualifying corporations, should be aware of the potential advantages of acquiring QSBS before 2012.

Under prior law, Section 1202 of the Internal Revenue Code of 1986, as amended, allowed an individual taxpayer to exclude 50 percent of any gain from the sale or exchange of QSBS held for more than five years (subject to certain per-issuer limitations). This exclusion was increased to 75 percent for QSBS acquired during certain periods after February 17, 2009. A portion of the excluded gain was treated as an item of tax preference for alternative minimum tax (AMT) purposes.