Specialized Small Business Investment Companies

Article excerpt

One of the enterprise and empowerment zone provisions of the Revenue Reconciliation Act of 1993 allows some taxpayers to defer gains on certain stock sales that they otherwise would be required to recognize.

ELIGIBLE TAXPAYERS

This new provision applies only to individuals and regular corporations; partnerships, S corporations, trusts and estates are not eligible.

ELIGIBLE TRANSACTIONS

Capital gains from the sales of publicly traded securities (stocks or debt instruments traded on an established market) on or after August 10, 1993, may be eligible for the deferral. In addition, only stock sales qualify; exchanges do not.

USE OF THE SALES PROCEEDS

All proceeds must be invested in specialized small business investment companies (SSBICs), which are partnerships or corporations authorized by the Small Business Administration to invest in small businesses owned by minority groups and economically disadvantaged individuals.

Mechanics. All proceeds from eligible stock sales must be rolled over into an SSBIC within 60 days from the date of sale. When the 60-day period expires, the tax benefits lapse. In effect, such gains are treated in much the same way as the gain on the sale of a principal residence, which may be rolled over if a new principal residence is bought within the proper time limit.

The amount of gain that otherwise would be recognized reduces a taxpayer's basis in the SSBIC interest; when (or if) this interest eventually is sold, any gain is recognized and taxed. If the sales proceeds exceed a taxpayer's cash investment in an SSBIC, the excess proceeds must be recognized currently and are taxable.

Only long-term capital gains are eligible for such treatment. Ordinary income from securities sales does not qualify.

Limits. The amount of gain that may be rolled over is subject to an annual cap and a lifetime cap; the cap's amount differs depending on whether the investor is an individual or a corporation. Individuals may elect to roll over $50,000 in any tax year, with a lifetime cap of $500,000; for spouses filing joint returns, the caps are allocated equally between the two (as is the amount of gain qualifying for the exclusion). …