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Valuable QSBS Opportunity for Investors and LLC's to End on December 31, 2011
December, 2011
By Jonathan Golub

In our blog post from December 2010, we discussed the potential for investors to acquire certain qualified small business stock ("QSBS") and be eligible to exclude 100% of the gain realized on a subsequent sale of that QSBS, if held for at least five years. That 100% gain exclusion for QSBS was enacted by Congress as a part of the Small Business Jobs Act of 2010 ("SBJA 2010") and then extended as a part of the Tax Extension Act of Dec. 17, 2010. Potential investors have a limited window to take advantage because this special exclusion only applies to QSBS acquired before January 1, 2012. 
The 100% gain exclusion described above is, however, limited to the greater of (i) $10 million or (ii) 10 times such taxpayer's basis in the QSBS. In the event the QSBS stock is acquired in an exchange (i.e. not for cash), the Section 1202 rules determine a taxpayer's basis in its QSBS stock to be equal to the fair market value of property transferred. So, if the LLC, at the time of its conversion, has a value at least $1 million, the cap on the gain exclusion will be increased (since the cap is equal to 10 times that value).  
While the gain exclusion described above benefits QSBS investors in a stock sale exit transaction, the LLC form may still be better in the event of an asset sale exit transaction. Many other differences exist between LLC's and corporations, so all factors should be thoroughly considered before an LLC is converted to a corporation to take advantage of the QSBS benefits described above.

For additional information, contact Jonathan Golub.






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