As a successful business owner, you are always looking ahead and considering your options. If your business is organized as a C-corporation, tax savings from the Section 1202 (§1202) exclusion should warrant your attention and consideration.
Under §1202, business owners who hold qualified small business stock (QSBS) and meet certain requirements may qualify for a 50 percent to 100 percent exclusion on gains received from the sale of your stock in the business (depending on the date of stock issuance), resulting in significant savings for the business owner. The amount of gain that any investor may exclude under §1202 is limited to a maximum of the greater of $10 million or 10 times the adjusted basis of the stock.
As tax reform remains in the headlines, §1202 may continue to evolve. With potentially rising capital gains rates, the value of the gain exclusion may increase. At the same time, some of the current proposals would reduce the amount of gain taxpayers with $400k or more of income may exclude. However, even with the currently proposed limitations, the §1202 exclusion may continue to provide significant benefit for eligible taxpayers.
The following scenario demonstrates the potential §1202 benefit under current law.
Does your business qualify?
For your business stock to benefit from the §1202 exclusion, you must meet the following requirements:
- Stock issuer is a C-corporation.
- Stock is issued to a noncorporate stockholder.
- Stock is acquired at its original issuance directly from the corporation.
- On the date of stock issue and immediately after, the gross assets of the business are $50 million or less.
- During the stockholder’s period of ownership, the corporation uses at least 80 percent of its business assets to conduct a type of trade or business that is not specifically excluded. Some of the specifically excluded business types are financial services, hospitality and many professional services.
Additionally, rules regarding timing and how much of the stock is redeemed are complex, so business owners are encouraged to consult with a trusted advisor before proceeding.
How DHG can help
If you are considering starting a new business or selling an existing business, DHG tax professionals can help you weigh your options regarding §1202, help determine if you meet the requirements, and offer guidance on next steps. You can look to us to provide a comprehensive overview regarding the specifics of your business and your potential savings under this powerful incentive program.
We look forward to integrating our technical knowledge and industry insight into helping you make an informed decision on the future of your business.