New Tax Benefits for Investing in Small Businesses


Gary P. ToberThe global economic meltdown has caused investors to take a
new look at investing in private companies and the tax breaks that might arise
from such investments. The recently enacted federal stimulus package contains
such a tax break, excluding 75 percent of the gain on the sale of shares of
certain companies from federal taxation. This tax break serves to encourage
investment in startup companies that would normally have difficulties enticing
capital investment.

Section 1241(a) of the American Recovery and Reinvestment
Act of 2009 amended Section 1202(a)(3) of the Internal Revenue Code so that 75
percent of the gain on Qualified Small Business Stock (QSBS) held for more than
five years is excluded in determining taxable income. As a result, gain from
the sale of QSBS to which the 75 percent gain exclusion applies is taxed at
effective rates of 7 percent on the regular income tax and 12.88 percent under
the alternative minimum tax regime. 

Who might be interested in this tax break for investments in
small businesses? First, company founders and entrepreneurs who use their own
capital to establish companies and develop new products and technologies. The
return on their efforts and risk taking will be enhanced by lower tax rates.
Second, QSBS would be of interest to investors in a startup business because of
the potential to provide a greater after-tax return when the investment in a
successful company is cashed out. Corporate investors are not eligible for the
QSBS exclusion.

In order to qualify for the 75 percent exclusion, the QSBS
must be acquired after Feb. 17, 2009, and before Jan. 1, 2011. For shares
acquired before or after these time periods, the gain exclusion is 50 percent
or 60 percent depending upon certain other criteria.

QSBS is defined in Section 1202(c) as stock that meets the
following conditions:

  1. issued by a domestic C corporation after Aug. 10, 1993;
  2. acquired by the shareholder directly from the company;
  3. acquired by an individual in exchange for cash, services
    or property other than securities;
  4. the issuing corporation has gross assets not exceeding
    $50 million at the time the investment is made; and
  5. the corporation uses at least 80 percent of its assets in
    the active conduct of one or more qualified trades or businesses.

There are some exceptions to the requirement that QSBS be
acquired directly from the company. Gifts, transfers at death, transfers from a
partnership, corporate organizations, stock conversions, options, warrants or convertible
debt provide exceptions to the original issue requirement.

At least 80 percent of the corporation’s assets must be used
in the active conduct of a qualified trade or business. Consequently, QSBS
benefits are principally available for manufacturing, technology, retail,
distribution and similar businesses. A qualified trade or business excludes
services in the fields of health, law, engineering, architecture, accounting,
actuarial science, performing arts, consulting, athletes, financial services, brokerage
services, farming business, oil and gas production, and any business of
operating a hotel, motel, restaurant or similar business. 

The exclusion for each eligible corporation applies only to
the extent that the gain does not exceed the greater of (a) 10 times the
taxpayer’s adjusted basis in the stock disposed of during the tax year or (b)
$10 million ($5 million for married individuals filing separately) reduced by
gain excluded in earlier years from sales of stock in the corporation.

While QSBS status can provide a significant tax benefit when
a shareholder sells shares, a prudent investor will consider the various tax
forms for entities when analyzing a potential investment. Use of pass-through
entities such as partnerships, limited liability companies or S corporations
can provide beneficial tax results to an owner.  The investment risks and tax costs of a successful
investment are among the factors to be considered when investing in a privately
held company.

This is a legal sponsored report from Lane Powell PC. Gary P. Tober, a shareholder at Lane Powell and
chair of the firm’s Tax Practice Group, focuses  his practice on tax and business
planning for United States and foreign corporations, partnerships and
individuals. He emphasizes the tax aspect of business formations,
operations and investment transactions in addition to advising on business and
legal aspects of such transactions. He can be reached at
or (206) 223-7984.

The 2016 Washington Manufacturing Awards: Legacy Award

The 2016 Washington Manufacturing Awards: Legacy Award

Winner: Belshaw Adamatic Bakery Group
Legacy Award
Belshaw Adamatic Bakery Group
Auburn ›
When it’s time to make doughnuts — or loaves of bread, or sheets of rolls — it could well be a Belshaw Adamatic piece of equipment that’s turning out the baked goods. From a 120,000-square-foot plant in Auburn, Belshaw Adamatic produces the ovens, fryers, conveyors and specialty equipment like jelly injectors used by wholesale and retail bakeries.
The firm’s two legacy companies — Belshaw started in 1923, Adamatic in 1962 — combined forces in 2007. Italy’s Ali Group North America is the parent.
It it takes work to maintain a legacy. A months-long strike in 2013 damaged morale and forced a leadership change. Frank Chandler was named president and CEO of Belshaw Adamatic in September 2013. The company has since strived to mend workplace relationships while also introducing a stream of new products, such as a convection oven, the BX Eco-touch, with energy saving features and steam injection that can be programmed for precise times in baking. The company energetically describes it as “an oven that saves time, reduces errors, makes an awesome product, and is fun to use and depend on every day!”
So far, more than 3,000 have been installed in quick-service restaurants, bakeries, cafés and supermarkets in the United States. They are the legacy of Thomas and Walter Belshaw, former builders of marine engines, who began producing patented manual and automated doughnut-making machines in Seattle 90 years ago. They sold thousands worldwide and, today, Belshaw Adamatic is the nation’s largest maker and distributor of doughnut-making equipment.