Investors and Entrepreneurs: Incorporate before 2012 to get 100% Capital Gain Exclusion

Under the Job Creation Act of 2010, you can exclude 100% of your capital gain (including no Alternative Minimum tax consequences) on the sale of C Corporation stock (not S Corporations or LLCs), under the following conditions:

  • Stock is acquired before January 1, 2012
  • You hold the stock for at least 5 years
  • At time of sale of the stock, it has been held for more than five years
  • The stock was acquired at its original issue for money, other property or services
  • Stock was not acquired through a stock-for-stock exchange (makes S Corporation conversion to a C Corporation somewhat tricky)
  • Assets cannot exceed $50M on the date the stock is issued
  • Most businesses qualify with the exception of the following:
    • Any trade or service business (such as accounting, consulting, law, etc.)
    • Any Banking or financial business
    • Any farming business
    • Any mining, oil, or gas business
    • Any business operating a hotel, motel, restaurant, or similar business

So, you incorporate in 2011 and sell your company 5+ years later for a $1M gain, you pay NO income or capital gain taxes – you avoid $150K in taxes (assuming capital gain tax is still 15% when you sell).  Same scenario, but you incorporate in 2012, you pay $150K in taxes.


IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.