Investing in Small Businesses

If your stock meets certain requirements at the time of issue and it has been held for at least five years, you can exclude from tax a percentage of your gain from the sale of the stock. The 100% exclusion and preferred AMT treatment were made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015, retroactively extended it for 2015. For the purposes of this provision, a small business is defined as a company with assets of less than $50 million that conducts an active trade or business.

You may defer gain on the sale of publicly traded stock if you reinvest in a “specialized small business investment company.” Normally, your individual deduction for net capital losses cannot exceed $3,000 each year. However, Section 1244 stock, a category created to encourage investment in small businesses, allows investors to deduct ordinary losses up to $50,000 ($100,000 for a married couple filing jointly).

The stock of most new businesses with no more than $1 million of initial capitalization will be given Section 1244 status. However, only the original owners of Section 1244 stock qualify for ordinary loss treatment.