If your investments include stock in certain small businesses, you may be able to exclude part of your gain when you sell the stock, or you may be able to roll over part of the gain tax-free.

Tests for Qualified Small Business Stock

The following tests have to be met in order for the stock to be considered Qualified Small Business (QSB) stock:

• The stock cannot be from an S corporation; it must be from a regular corporation, known as a C corporation.
• The original issue date of the stock must be after August 10, 1993.
• The corporation must not have had more than $50 million in total gross assets at any time on or after August 10, 2003, and before and after the original issue date of the stock.
• You must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property or as pay for services (other than as an underwriter) to the corporation.
• The corporation cannot have purchased more than a de minimis amount of its own stock from you or a person related to you during the period from 2 years before until 2 years after the stock was issued, and during the period from 1 year before until 1 year after the stock issue date, the corporation must not have purchased more than 5% of its own stock from anyone.
• During substantially all the time you held the stock, the corporation must be an eligible corporation and at least 80% of its assets must be used in the active conduct of what is considered a qualified business.

What Is An Eligible Corporation?

In order to be Qualified Small Business stock, the corporation that issues the stock must be a U.S. corporation, not a foreign corporation, and cannot be any of the following:

• Domestic International Sales Corporation (DISC),
• A corporation that has made an election under Section 936 of the Internal Revenue Code regarding tax credits in Puerto Rico and U.S. possessions,
• Regulated investment company,
• Real estate investment trust (REIT),
• Real estate mortgage investment conduit (REMIC),
• Financial asset securitization investment trust (FASIT), or a
• cooperative.

What Types of Businesses Qualify?

Qualified small businesses, for purposes of excluding part of the gain on the sale of the corporation’s stock, can include any type of business except the following, which are specifically excluded:

• Professional services corporations, including businesses that offer services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.
• Business whose principal asset is the reputation or skill of one or more employees.
• Banking, insurance, financing, leasing, investing, or similar business.
• Farming business.
• Business involving the production of products for which percentage depletion can be claimed.
• Business of operating a hotel, motel, restaurant, or similar business.

A specialized small business investment company (SSBIC) is considered to be engaged in the active conduct of a qualified business, and therefore qualifies.