The “avoid the fiscal cliff” bill, known as the American Taxpayer Relief Act of 2012 and passed back in January, had an important provision that many seem to have overlooked. An exemption from all federal capital gains tax for qualifying “small business stock” (under Section 1202 of the Internal Revenue Code) was restored after being taken away in 2011, at least for stock acquired in 2012 or 2013. It expires January 1, 2014.

I am by no means a tax professional, but as I understand it, to qualify, investors have to be individuals (or investing through a partnership) buying stock of a “C” corporation with $50 million or less in assets. There’s a cap to the exemption of the greater of $10 million or 10 times your original cost basis of the stock. You have to hold the stock for at least 5 years to get the exemption. Finally, this same amount of gain will not be subject to the new 3.8% Medicare tax which will apply to other capital gains earned starting in 2013.

This is great especially for the angel community and those raising “friends and family” rounds of capital. This will also lead more folks to consider forming new businesses as C corporations instead of LLCs or “S” corporations.