Smooth Moves

Roll over your small-business investments and shield yourself from capital gains taxes.

Do you need or want a cash infusion? A little-known provision in the tax code could result in big savings in capital gains taxes if you invest in entrepreneurial ventures.

The provision, Section 1045, became effective under the Taxpayer Relief Act of 1997 to encourage new investment in small business, says Rande Spiegelman, senior manager of personal financial planning for accounting firm KPMG in San Francisco.

Under the provision, you're allowed to roll gains from one small-business investment into another and put off paying taxes owed from the initial investment, the money for which can be from any source. With this type of tax deferral, if you roll over all your gain, you may get 100 cents on the dollar when you reinvest.

To qualify for the deferral, the investments must be considered Qualified Small Business Stock (QSBS). This means the stock has to satisfy all the requirements stipulated in Section 1202 of the law. The business you're investing in must be active and organized as a C corporation; must have been acquired by the taxpayer at its original issue in exchange for money and have assets below $50 million when you make your investment; and its stock must have been originally issued after August 10, 1993. But know there are also some businesses that don't qualify for the special tax treatment, including banks, hotels, restaurants and professional service companies.

Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 14 years.

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This article was originally published in the March 2001 print edition of Entrepreneur with the headline: Smooth Moves.

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