What is a Small Business?

---

To encourage investments in certain small businesses, tax law provides certain tax benefits to investors. There is no one, standard definition for the term small business in the Internal Revenue Code. The elements used to define a small business vary, depending on the type of tax benefit involved.

For example, qualifying elements may be:

• Quantitative
• Financial
• Type if Business structure
• A combination of elements

Quantitative Element Defining a Small Business

Tax Benfit: Pension Plan Tax Credit for Small Business.

For a small business to qualify for the tax credit for pension plan start-up costs it may not have more than 100 employees. In this case, the qualifying element defining what a small business is, is quantitative (number of employees).

Financial Element and Type of Business Structure Defining a Small Business

Tax benefit: Exclusion of 50% of gain from sale of qualified small business stock (QSB stock).

To qualify for the Section 1202 50% exclusion of the gain on the sale of small business stock, the business must be a C corporation (not an S corporation) with gross assets of no more than $50 million. In this case, there are two qualifying elements:

1. Business structure: The small business must be a C corporation, not any other type of business structure
2. Financial: Gross assets of no more than $50 million.