These are Magic numbers!

Want to exclude a major portion of gain when selling your business? Then don't overlook the magic of "Section 1202 stock" and "Section 1244 stock" as two invaluable business tools.

Section 1202 stock will allow investors, including yourself, to shelter more gain on their shares should the value of the business skyrocket as planned. Section 1244 stock plays the downside, letting shareholders offset losses against ordinary income from other sources -dollars back in your pocket for a softer landing. Both Section 1202 and Section 1244 stock can help you raise and protect capital, both yours and those willing to invest in your business.

Investors other than corporations may exclude up to 50 percent of any gain realized on disposition of qualified small business stock (a.k.a., "Section 1202 stock," named after the Internal Code Section from which it originates) held for more than five years. While this requires a long-term commitment in the business, the payoff is obviously large.

Some ground rules. The amount taken into account for exclusion is limited to the greater of $10 million or ten times taxpayer's stock basis. Tax-free rollovers into other qualified small business stock may be available, too, further helping to defer tax on gain. To qualify, the business also must be a corporation that passes a gross assets tests: business assets can't exceed $50 million. And to prevent using a business as a "disguised bank account", at least 80 percent of the business's assets must be used for active business purposes. That's it! If these circumstances fit a particular startup business situation, electing small business stock treatment is close to a "no-brainer."

Section 1244 stock

Now for some downside protection, compliments of Uncle Sam. Losses from the sale or exchange of stock in a small business corporation qualifying under Internal Revenue Code Section 1244 are deductible as ordinary losses up to $50,000 for an individual ($100,000 on a joint return if the investment is made with a spouse), per year.

A small business corporation for this purpose is a domestic corporation, in which the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1 million, determined at the time of issuance of the stock and taking into account all stock previously issued. If aggregate capital receipts exceed $1 million, stock issued in excess of $1 million does not qualify as Section 1244 stock.