For once the government and entrepreneurs have one thing in common: they both think that investing in small growing businesses is a good idea. In order to encourage investment in small businesses, Congress has authorized tax benefits for people who invest in certain small businesses.
If a small business meets the definition of a Qualified Small Business (“QSB”), as defined in the applicable sections of the Internal Revenue Code (the “Code”), investors in the business will have the opportunity to benefit from up to three types of preferential tax treatment:
– a 50% exclusion of gain realized by the investor upon the disposition of the stock (Section 1202 of the Code);
– deferral of the gain realized by the investor if the investor “rolls over” such gains by purchasing additional QSB stock (Section 1045 of the Code); and
– if the investor losses money on the investment, re-characterization of any capital losses as ordinary losses (Section 1244 of the Code).