Section 1202: QSBS Capital Gains Exemption Explained

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Key Takeaways

Qualified Small Business Stock can offer a capital gains exclusion under Section 1202 for certain C corporation shares held for more than five years. This reduces taxable gain on sale.
To be eligible, the issuing company must satisfy active business and asset tests at issuance and during a certain holding period. Confirm eligibility with company records and your attorney.
The exclusion amount depends on the acquisition date and can be as high as 100 percent for qualified stock. Statutory ceilings and AMT regulations may be relevant.
Investors need to monitor acquisition date, holding period, and stock redemptions or reorganizations in order to maintain QSBS status and record compliance.
Think about tax-planning strategies, coordinating sale timing, using trusts or rollovers, and seeking out a tax professional’s expertise to maximize the benefits and get through the reporting requirements.
Use this advantage solely after verifying company organization, considering local and global tax regulations, and seeking official tax counsel when cross-border matters or sophisticated deals arise.

QSBS 1202 capital gains exemption allows qualified small business stock holders to exclude up to 100% of gain from federal tax under certain conditions.

Eligibility depends on holding QSBS for at least five years, satisfying active business requirements, and various limits based on acquisition dates and investor types.

The rule can significantly reduce tax bills for founders and early investors.

The body details tests, dollar caps, filing steps, and common pitfalls.

Conclusion

QSBS 1202 cuts tax on small business stock gains. This allows qualified investors to retain up to 100% of return for qualifying shares if held five years or more. The rules cap the type of company, active business test, and investor treatment. Maintaining dates, basis, and company facts is important. Speaking with a tax pro can help you verify whether you are eligible and how to plan for holding periods, stock sales, and estate moves. For instance, an investor who purchases qualifying tech stock at €50,000 and holds it beyond five years can probably skip federal tax on a significant chunk of the gain. Go over your situation, collect paperwork, and receive personalized advice from a CPA or tax lawyer to apply the exemption effectively.

Frequently Asked Questions

What is QSBS under Section 1202?

Qualified Small Business Stock (QSBS) 1202 is stock in a U.S. C-corporation that satisfies size, active business, and holding-period rules, permitting qualified shareholders to exclude gain on sale from federal income tax.

Who qualifies for the QSBS capital gains exemption?

Individuals and some non-corporate investors are eligible if they purchased QSBS at original issuance, held it for at least five years, and the issuing C-corporation satisfied active business and gross asset tests at the time the stock was issued.

How much gain can be excluded under Section 1202?

Depending on acquisition date and business type, up to 100% of gain can be excluded, subject to limits. This is typically the greater of $10 million or 10 times the investor’s basis in the stock. Rules are different by date of issuance.

Which businesses are eligible to issue QSBS?

Qualifying issuers are domestic C-corporations and cannot have aggregate gross assets of $50 million or more at issuance. Excluded are some service, finance, and investment businesses. Active business requirements apply for most of the holding period.

How long must I hold QSBS to get the exclusion?

You need to hold QSBS for over five years in order to be eligible for the 1202 exemption. Shorter holding periods are not eligible, though rollover and special rules might apply in some limited scenarios.

Are there state tax implications for QSBS gains?

State tax treatment is different. Some states conform to federal Section 1202 exclusion, others do not. Confirm state tax consequences with your state rules or a tax professional.

What documentation should I keep to support a QSBS claim?

Preserve stock purchase records, statements of corporate capitalization and gross assets, business activity documentation, and holding-period evidence. Hold on to legal and tax opinions whenever possible to support the claim.