Question on Section 1202 Exclusion

Apparently in September the Small Business Jobs Act of 2010 was passed, which makes the Section 1202 exclusion on qualified small business investments 100%, up from 50%. The article I got this from is here:

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One of the requirements for the investment is that it be in a "Qualified Small Business" and this in turn requires:

"For substantially all of the taxpayer's holding period, the corporation must use at least 80% by value of its assets in the active conduct of a qualified trade or business. This includes assets used in furtherance of a prospective active business (Section 195 and 174 activities). It also includes working capital, investments expected to finance research, and computer software rights that produce active business royalties. However, after the corporation has existed two years, no more than 50 % of the assets can be working capital or investments held for future research."

The above confuses me a bit. First, is there no test against the percent of *revenue* that must be from the active conduct of a trade business? It seems really bizarre that they make the test against assets instead of revenues.

Second, how in practice could one ever determine which assets are used to further a trade business and which are not? If the investment is in a biomedical firm that may not show any revenues at all for six years, and they are sitting on $30M of cash and investments, how does one determine that the assets were in the active conduct of the business? I suspect that the real test here is that certain kinds of assets (e.g., real estate) are automatically excluded? Does anyone have more detail on what kinds of assets support a trade business and which sorts are forbidden, in making this 80% asset test?

Third, what did they mean by "However, after the corporation has existed two years, no more than 50 % of the assets can be working capital or investments held for future research." Does anyone know of an article that shows a few example balance sheets to show which ones are in compliance and which ones violate this more stringent two year rule?

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