The Silicon Valley Loophole (10/26/00) Vol. 104, No. 42 p.7; Boss, Shira J.

A 1997 provision of the tax code called 1045 will allow investors to defer paying taxes on capital gains made on the sale of stock of a startup company by reinvesting the money in another new small business. The tax break applies to investments in small businesses that are C corporations and have less than $50 million in assets. Investors must hold the company's stock for at least six months. Although capital gains are to be tallied for the original investment, rolling over the gains into another qualified small business within 60 days keeps the deferral alive. The amount of a stock's appreciation that would qualify for the tax break is limited to the value from the time it is acquired until the time when the company no longer is considered a small business. Unfortunately, gains of more than $10 million, or 10 times the original investment, will be taxed at regular rates. Investors can hedge.

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