Zero Capital Gains
A provision of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which was signed into law on December 17th, 2010, provides a 100% exemption for gains made in Qualified Small Business Stock. This benefit relates to investments made between September 27, 2010 and December 31, 2011.
"This creates an immediate opportunity to lock in a zero percent capital gains rate on long-term investments in small business stock." says Payson R. Peabody, Of Counsel at Dykema Gossett PLLC, Washington, DC. "Taxpayers have from September 27th until the end of 2011 to take advantage of the new provision by acquiring stock. Those who can take advantage of it could profit handsomely." Peabody says.
The new provision modifies the existing law tax break for small business stock purchases in two ways:
Under prior law, even though 50 percent of small business stock gain could be excluded, part of the gain was added back into the calculation of AMT.
Investments of individuals or partnerships in the stock of a regular C corporation (not an S corporation) with less than $50 million in assets ordinarily will qualify. The stock must be purchased directly from the corporation and held for at least five years. The amount of gain that can be excluded is limited to the greater of ten times the investment or $10 million.
At least 80 percent of the corporation's assets must be used to carry on a business or to conduct research or startup activities. Most businesses are eligible, except for businesses in the service, finance, mining, extraction, restaurant, and hospitality industries and certain types of real estate businesses.
If qualifying companies are acquired in a tax-free reorganization by a publicly traded company during the five year holding period, the tax rules in some cases allow investors to hold the stock of the acquiring company to satisfy the five-year holding requirement.
Small business stocks are sometimes eligible for special tax treatment under Section 1202 of the IRS code. In some cases, you can defer your capital gains indefinitely. In others, you can exclude up to 50% of your profits from the tax calculation.
Individual investors may qualify for a special tax treatment on capital gains earned from small business stocks under section 1202 of the IRS code. Normally, small business stocks are taxed at 28% rates. There are actually several capital gains tax savings provisions that you can take advantage of to help you build wealth.
Here's how it works:
Exclusion of 50% of Capital Gains from the Capital Gains Tax Calculation
Deferred Capital Gains Taxes on Section 1202 Small Business Stocks
You can also defer the gains you earn from small business stocks under a provision in IRC Section 1045. If you have held your shares for at least six (6) months, and you sell them, you won't have to pay the capital gains tax as long as you use the money to buy shares of another qualifying small business.
What Counts as a Qualified Small Business Stock Gain Section 1202 Profit?
According to Startup Company Lawyer, "Qualified small business stock is defined in Section 1202 as any stock in a qualified small business issued to the taxpayer after August 10, 1993 in exchange for money or other property (not including stock), or as compensation for services. A qualified small business is a domestic C Corporation in which the aggregate gross assets of the corporation at all times since August 10, 1993 up to the time of issuance do not exceed $50,000,000. However, stock will not be considered to be qualified small business stock unless during substantially all of the taxpayer's holding period the corporation meets certain "active business" requirements. Stock issued by an S corporation does not qualify as qualified small business stock (even if the S election is later revoked), although subsequently acquired stock may qualify. In general, gain from stock issued to "flow-through entities" such as partnerships and S corporations should qualify under Section 1202. However, the amount of the qualifying gain is limited to the interest held by the partner or S corporation shareholder on the date the stock is acquired. This limitation may be significant in certain venture fund settings when the general partners' interests fluctuate over time." 
Below are links to several articles that pertain to "QSBS" or Qualified Small Business Stock Capital Gain Tax Exclusion Expanded. These articles help to explain the history and purpose of 1202; the fine print in understanding qualified small businesses and stock, the impact on AMT, and tax implications.
Investing in qualified small businesses can be beneficial to both the individual investors and to the economy as a whole. Especially with the increased 100 percent exclusion of eligible gain, taxpayers may take advantage of these potentially significant tax savings and qualified small businesses may receive the support they need as they struggle to recover from the economic downturn.
Because of these benefits, Taxpayers planning to incorporate their business in 2011 should consider pushing to file necessary documents and issuing stock before the end of 2010.
 Temporary Exclusion for 100% of Gain from Qualified Small Business Stock Acquired by Year End