8683 / What are the requirements to exclude 50, 75 or 100 percent of the gain on the sale of qualified small business stock?

If certain requirements are met, a noncorporate taxpayer (including certain partnerships and S corporations) may exclude from gross income 100 percent of any gain from the sale or exchange of qualified small business stock held for more than five years if the stock was purchased after September 27, 2010.¹ For stock purchased before February 18, 2009, the exclusion was limited to 50 percent, and for stock purchased between February 18, 2009 and September 27, 2010, the exclusion was limited to 75 percent.² With certain exceptions, a qualifying small business is:

A domestic C corporation (not an S corporation) with aggregate gross assets that do not exceed $50 million between August 10, 1993 and the date the stock was issued (the aggregate gross assets also cannot exceed $50 million immediately after the stock was issued);³

Any trade or business other than one involving the performance of legal, health, engineering, architecture, accounting, actuarial services, or any other trade or business in which the principal asset is the skill or reputation of its employees; and

At least 80 percent of its assets by value must be used in the active conduct of a qualified trade or business.

The aggregate amount of eligible gain from the disposition of qualified small business stock issued by one corporation that may be taken into account in a tax year may not exceed the greater of the following amounts:

(a)  $10 million ($5 million in the case of married taxpayers filing separately) reduced by the aggregate amount of such gain taken into account in prior years; or

(b)  10 times the aggregate bases of qualified stock of the issuer disposed of during the tax year.

For purposes of the limitation in (b), above, the adjusted basis of any qualified stock will not include any additions to basis occurring after the stock was issued.⁴