Selling equity
		Capital gains taxes
		Handing over the reins
		Estate taxes

The following is a primer on the capital gains tax and how it potentially affects you as small-business owner if you sell some of your shares:

• Capital assets and capital gains. Similar to your home or investment portfolio, stock that you own in your business is a capital asset. If the stock rises in value, or appreciates, you owe taxes on the appreciated amount. This amount is called a capital gain.
  
  For example, if you buy 100,000 shares for fair market value (FMV) of $10 each, and you sell 20,000 shares a year later at $15, the amount of the capital gain is $100,000 -- $5 a share times 20,000 shares.
  
  
• Using basis to calculate the value of your shares. In the example, above, the fair market value of shares was $10 at the time you obtained the shares. The cost at which a capital asset is acquired is called its basis. Since the IRS allows you to add certain legal and transaction costs to the market price, your adjusted basis is often higher than your regular basis. For example, if you paid $5,000 in recording and legal fees, you would add this cost to your basis of shares.
  
  Shares of stock of small companies do not trade hands very often (i.e., they have a low level of liquidity). As a result, it may be harder to estimate the basis of shares for a small business. You may wish to use the amount of equity you invest in your business to calculate basis. An appraisal or review by a professional accountant may help you decide which basis to use.
  
  
• Paying capital gains tax.When you sell shares of your business at a profit, you incur capital gains taxes. For shares of qualified small business stock, the capital gains tax rate is 15% or 5% (depending on your tax bracket) on the portion that is not excluded from tax. The capital gains tax rate for stock that does not fit this category is 15% if the stock was held for at least one year.
  
  With qualified small business stock, you can roll over some or all of the capital gains you earn on its sale. Similarly, you may also be able to exclude one-half of taxable gains of the sale of qualified stock. The IRS compensates for the tax breaks that qualified small business stock offers by levying a higher rate on taxable gains.
  
  
Generally, you can offset your capital gains with capital losses. You match long-term (assets held longer than one year) capital losses with long-term capital gains. You also match short-term (those earned on stock held for less than one year) losses with short-term gains.

If you run out of long-term capital gains, you can offset up to $3,000 of ordinary income ($1,500 if married filing separately) in a year with capital losses. Any unused capital losses can be rolled over and used in future years with the capital loss carryover rule.


• Non-taxable events. When you transfer property to your small business in exchange for stock, the IRS generally considers the event to be non-taxable, provided you have a controlling stake in the company immediately after the transfer. (You can also calculate your basis from the value of the transferred property.)
  
  The IRS determines you to have a controlling stake if you hold at least 80% of all classes of stock, including shares with and without voting rights.
  
  If you transfer stock to a spouse, the event is non-taxable. The spouse inherits the basis or adjusted basis that existed at the time of the gift.
  
  
• Forms & Publications. You can find details on capital gains taxes in IRS Pub. 544 and Pub. 550. For additional information on calculating basis, see IRS Pub. 551.
  
  You report capital gains on IRS Schedule D of Form 1040. To record a sale of small business stock that takes advantage of the ordinary-income loss limit of $100,000 under Section 1244, use line 10 of Form 4797. .
  
  

Next Topic: Handing over the reins