Tax News
The PATH Act of 2015 makes the 100% QSBS gain exclusion permanent
December 22, 2015
Legislative Actions
Protecting Americans from Tax Hikes (PATH) Act of 2015 was just signed by the President and is officially the law. The Act retroactively increases the Sec. 1202 QSBS gain exclusion for stock acquired in 2015 and prospectively makes the 100% exclusion permanent. Before the enactment of the PATH, only stock acquired before December 31st 2014 qualified for the 100% exclusion, thus, leaving out purchases made during 2015.  Under the Sec. 1202 QSBS rules, the gain eligible for exclusion could be as high as $10 million. Any gain above that amount is taxed at a maximum rate of 28 percent. Seven percent of the excluded gain is an alternative minimum tax preference. To qualify as a small business, when the stock is issued, the aggregate gross assets (i.e., cash plus aggregate adjusted basis of other property) held by the issuing corporation may not exceed $50 million. This rule applies only to C-corporation stock; it does not benefit investors in LLCs or LLPs treated as flow-throughs.

The PATH enactment is surely welcomed by the venture capital community and specifically Silicon Valley. While some service businesses may not qualify for Sec. 1202 treatment, and in others cases setting up as a U.S. C-corporation may not be the best choice for a startup, in many instances QSB is the way to go. As a result QSBS is already baked in the term sheets of many start-ups, including in NVCA precedent. The newly enacted PATH law gives a welcome reprieve for VCs and provides assurance that the 100% exclusion is here to stay for purchases going forward. 
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Tags: QSBS, PATH act, venture capital tax