Buzz
For those employed by small businesses or startups receiving stock as part of their pay, it's crucial to discuss the qualified small business stock tax exclusion with your accountant.
As reported by The New York Times, not all accountants are familiar with this so-called 'tax loophole,' which is why it's important to bring it up yourself. It could lead to significant savings on your taxes:
The tax code provision pertains to what is known as qualified small-business stock. Individuals investing in companies valued under $50 million may exclude from their taxes either $10 million or up to 10 times their investment, whichever amount is higher. This applies to employees at startups who receive stock as part of their compensation packages.
[...]
There are some conditions to be aware of when electing, beyond just the company size when an employee is granted shares. For example, the employee must hold the stock for a minimum of five years. Additionally, the stock must come from a company that manufactures goods, including tech companies. This effectively excludes law firms, accounting offices, financial service companies, and other service-based businesses.
In essence, if your stock qualifies as small business stock or 'QSB' stock, you'll likely be exempt from taxes on a significant portion, if not all, of your stock profits. Here's the IRS's explanation:
You can generally exclude up to 50% of your gain from the sale or exchange of qualified small business stock held for over five years. For stock acquired after February 17, 2009, and before September 27, 2010, the exclusion can be as much as 75%, and for stock acquired after September 27, 2010, it can go up to 100%. Certain empowerment zone business stock may qualify for a 60% exclusion. The remaining gain, after applying your section 1202 exclusion, is taxed at a 28% rate. See
Empowerment zone business stock
and
Capital Gain Tax Rates
for more information.
If all of this sounds complex, that’s exactly why you need to consult with an accountant, and make sure they’re familiar with this particular area of tax law.
If your previous accountant didn’t mention the potential tax savings—or if you filed your taxes on your own and missed out—you have up to three years from your original tax filing date (or two years from when you made the tax payment, whichever is later) to file an amended return and claim your refund.
