On January 31, 2012, President Obama sent a Startup America Legislative Agenda to Congress that included a proposal to “expand and make permanent zero capital gains on small business investments,” which is presumably a reference to making the 100% gain exclusion on Qualified Small Business Stock (“QSBS”) investments under Section 1202 of the Internal Revenue Code (which exclusion percentage expired as of December 31, 2011) permanent.

By way of background, recent changes to Section 1202 allow 100% exclusion from federal taxable income of gain realized (up to $10,000,000) by investors who made qualified investments after September 27, 2010 and before January 1, 2012.  The 100% exclusion rule applies for both regular and Alternative Minimum Tax (“AMT”) purposes.  This rule change makes calculating the projected tax on sale very simple—qualifying gain is subject to zero federal income tax, period.

For investments in QSBS made prior to September 28, 2010, the benefits that investors have received have been minimal.  While gain from the sale of QSBS purchased after August 10, 1993 and before February 18, 2009 is generally eligible for a 50% exclusion, the portion of the gain that is not excluded is generally subject to a 28% tax rate (not the current long-term capital gain rate of 15%).  Accordingly, the effective tax rate for QSBS gains subject to the 50% exclusion is generally 14%.  (As an aside, 14% may seem much more attractive if the capital gain rates return to 20-28% when the Bush tax cuts expire at the end of 2012, but when compared to the current long-term capital gain tax rate of 15% it is only a 1% tax break.)

Please see full article below for more information.