In late 2015, Congress passed legislation that provides investors a 100% exclusion on gains made via investments in companies with Qualfied Small Business Stock. This exclusion is also known as "IRC Section 1202."  The exclusion is available to investments made in companies beginning January 1, 2015.  ACA greatly appreciates this legislation and will continue to work with Congress for technical improvements.

Criteria and Limitations for Qualified Small Business Stock:

  • Investments must be made by a non-corporate investor (for example, individuals or funds structured as LLCs).
  • Investments must be made between January 1, 2012 and December 31, 2013 to qualify for no taxes on the gains.
  • The company in which the angels invest must be a C corporation and must be a qualifying type of business (many businesses except financial institutions, farms, professional service firms, hotels, and restaurants)
  • The company in which you invest must not exceed $50 million in aggregate gross assets at any time before the investment or immediately afterward. An important issue in this size is that 80% of the assets must be used in the "active conduct" of the business at all times.
  • The stock must be purchased by the investor as an original issuance from the corporation, directly or through an underwriter. So, notes and warrants do not count. We're hearing that if you have an outstanding note that converts to stock before December 31st, then the stock would count for this program. (BUT TALK TO YOUR ACCOUNTANT.)
  • The stock must be held for more than five years (subject to exemptions for qualifying tax-free rollovers)
  • There are limitations on redeeming shares of the company's stock before and after the qualified stock is issued.
  • The gains eligible for the zero taxes by any single taxpayer max out at $10 million or ten times the adjusted tax basis of stock issued by the stock
  • The gains are also not subject to the Alternative Minimum Tax.

ACA recommends a full review of the legislation with your tax counsel to understand this provision and others that may or may not affect individual angels.

Resources for Angels to Understand and Implement QSBS Exemptions:

Some ACA members recommend that investing in LLCs provides superior results than C Corps, including the 100% exemption. For more information on this subject, read LLC, CCorp or S Corp? by the Central Texas Angel Network.