Avoid capital gains tax with QSBS

Qualified small business stock (QSBS) is an often overlooked, but potentially lucrative, investment. Be aware that it’s subject to several strict requirements. But if they’re met, you can avoid tax on 100% of your gain when the stock is sold. Among other things, to qualify as QSBS, stock must be issued by a U.S. corporation whose aggregate gross assets don’t exceed $50 million before or immediately after the stock is issued. Also, the corporation must use at least 80% of its assets in one or more qualified active businesses. Several types of business are ineligible, including most professional services, banking, insurance, farming, oil and gas, and hospitality.

To enjoy tax-free capital gains, you must acquire the stock as part of an original issuance — or as compensation for services or through gift or inheritance — and hold it for at least five years. C corporations aren’t eligible investors. Several other requirements and limitations apply, so don’t attempt to make such an investment without professional guidance.

Feeling philanthropic? Steer clear of splitting property among charities

Typically, when you make a bequest of property to charity, its value escapes estate tax. But according to the U.S. Tax Court, that may not be the case if you split an asset between two or more charities. In a recent case, a donor left her 100% interest in a limited liability company (LLC) to two charities: 75% to a private foundation and 25% to a church. When she died, the LLC, which owned an interest in a mobile home park, was valued at just over $25 million. On her estate tax return, her estate deducted the LLC’s full value as a charitable donation.

The court agreed with the IRS that fractional interest discounts should be applied to each charity’s gift, reducing the combined charitable deduction by more than $4 million and triggering nearly $1.7 million in additional estate tax. To avoid this result, donors should consider leaving an asset to a single charity, such as a private foundation, and allow the foundation to determine its ultimate disposition.

Watch out for OIC mills

According to the IRS, unscrupulous promoters are claiming taxpayers can settle tax debts for pennies on the dollar using an offer in compromise (OIC). The scammer charges exorbitant fees — even if the taxpayer doesn’t qualify for an OIC — for information that taxpayers can easily obtain on their own. If you’re seeking to settle a tax debt, use the IRS’s Offer in Compromise Pre-Qualifier tool to check your eligibility for free.

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