By Bob Barnett, J.D., Staff Writer, Business Owner's Toolkit

If you're one of those year-end, stock market profit-takers, and you're looking to defer taxes on your capital gain, you might want to take advantage of a little-known tax code provision that lets you defer taxes if you reinvest your gain in what are known as SSBICs.

An SSBIC is a Specialized Small Business Investment Company. Small Business Investment Companies are SBA-licensed private companies that make loans to and investments in small and emerging companies. An SSBIC, then, is an SBIC that specifically makes loans to businesses run by socially or economically disadvantaged people.

In 1986, in order to stimulate investments in SSBICs, Congress enacted Code Sec. 1044, which allows investors to defer taxes on capital gains if the gains are reinvested in SSBICs. With the stock market rising so much over the past couple of years and with many investors looking to take out their profits before year end, Sec. 1044 takes on added significance. Here's a look at how it works:

• C corporations and individuals may elect to defer recognition of capital gain realized on the sale of publicly traded securities. The election is not available to partnerships, S corporations, estates, and trusts.
• The proceeds must be used to purchase common stock or a partnership interest in an SSBIC within 60 days after the sale of the publicly traded securities.
• Sales proceeds that exceed the cost of the SSBIC stock must be currently recognized.
• The amount of gain that an individual may elect to roll over for a tax year is limited to the lesser of $50,000 or $500,000 reduced by any gain previously excluded under this code section. Married individuals who file separately are limited to $25,000 and $250,000.
• For C corporations, the annual and cumulative limits are $250,000 and $1 million.
• The deferral is available to the taxpayer for as long as the investment is maintained in the SSBIC.

One reason that so few taxpayers have taken advantage of Code Sec. 1044 is that there have been virtually no publicly traded SSBICs. But that's starting to change. For example, on November 26, 1996, Freshstart Venture Capital Corp (Nasdaq: FSVC) began trading on the Nasdaq SmallCap market and became what is thought to be one of the first publicly held SSBICs. Freshstart, founded in 1982, primarily finances taxicabs in the New York City area. If you're interested in more information or a copy of the company prospectus, call 212-265-2249.

Let's look at how the tax deferral might work in practice. Suppose you bought 100 shares of common stock for $50, or $5,000, and by now you have a gain of about $8,600. If you sold your 100 shares, and invested the proceeds, $13,600, in an SSBIC, you would not have to recognize the $8,600 gain on your federal income tax return.