What is the PATH Act?
The PATH Act, or Protecting Americans From Tax Hikes Act of 2015, was created with the primary purpose of protecting American taxpayers from tax fraud. In order to do this, they delayed the delivery of refunds for those who file before February 15 and seek certain tax credits. This delay gives the IRS more time to confirm returns and ensure that refunds are not issued to identity thieves.
Another benefit to taxpayers by the PATH Act, was the extension of many tax cuts that were set to expire. Of those, QSBS and the associated tax benefits were extended.
History of QSBS and the Rise to 100% Exemption
Section 1202 which defines qualified small business stock, QSBS, was originally enacted under President Clinton’s Presidential term. It outlines that investors in qualified stock purchased after December 31, 1993 would benefit from excluding 50% of the capital gains realized upon the sale of said stock from their taxable income. The exclusion covered gains up to $10 million or 10X the adjusted basis of the stock, whichever is the greater amount. These shares would also have to be held for a minimum of 5 years to qualify for this exclusion.
In 2012, under President Obama, this exclusion was raised by the American Taxpayer Relief Act to 75% for QSBS purchased between February 17, 2009 & September 26, 2010, and 100% for QSBS purchase after September 27, 2010. The $10 million or 10X cap—the greater amount—and 5 year holding period would still have to be met for these benefits.
These 75% and 100% exclusion rates actually expired and the benefit of section 1202 returned to a 50% exclusion for any QSB stock acquired after December 31, 2014. Luckily for investors and American small businesses alike, the PATH Act, retroactively restored the 75% and 100% exclusions and made them permanent elements of the tax code.
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This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.