What is Section 1202 qualified small business stock?

Section 1202 was enacted in 1993 to encourage investment in small businesses. It allows individuals to avoid paying taxes on up to 100% of the taxable gain recognized on the sale of qualified small business corporation stock (sometimes referred to as QSBS).

What is Section 1202 small business stock?

Section 1202(a) of the Code1 allows non-corporate taxpayers to exclude from gross income a percentage of capital gain recognized on the sale of QSBS that is held for more than five years.

What businesses are excluded from Section 1202?

The definition of a QTB also excludes any business in banking, insurance, financing, leasing, investing, or farming, and any hotel, motel, or restaurant (Sec. 1202(e)(3)).

What is a 1202 gain and how is it taxed?

The amount of gain that any investor can exclude under Section 1202 is limited to a maximum of the greater of $10 million or 10 times the adjusted basis of the stock. 1 The taxable portion of a gain from selling a small business stock has an assessment at the maximum tax rate of 28%.

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How do small businesses qualify for stock?

The company must be engaged in a qualified trade or business (QTB) during “substantially all” (likely somewhere between 70% and 90%) of the taxpayer’s holding period in the stock. A QTB is any trade or business other than certain excluded businesses.

Is 1202 stock subject to AMT?

Section 1202 provides for a lower percentage of exclusion (generally 50% or 75%) for QSBS issued prior to September 28, 2010. The amount of gain that is not excluded is generally taxed at a 28% rate and is also subject to the NIIT. The excluded portion of any gain is treated as a preference item for AMT purposes.

What is qualified business stock?

Qualified small business stock (QSBS) refers to shares of a qualified small business (QSB) as defined by the Internal Revenue Code (IRC). A QSB is an active domestic C corporation whose gross assets—valued at the original cost—do not exceed $50 million on and immediately after its stock issuance. 1

Can LLC qualify for 1202?

Partners in a partnership (including an LLC electing partnership status for federal tax purposes) operating a business are not eligible for the section 1202 gain exclusion upon the sale or exchange of their partnership interest.

Can an S corp be a qualified small business stock?

Generally, if the issuer of stock is an S corporation, stock issued by the S corporation does not and will never qualify to be QSBS. … [2] The holding period for the QSBS would likely be held to commence when the stock is exchanged in the reorganization, although there isn’t any guidance addressing that point.

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Does preferred stock qualify for 1202?

“Stock” for Section 1202 purposes includes voting and nonvoting stock and common and preferred stock. Stock issued by an S corporation will never ever qualify for Section 1202’s gain exclusion, no matter how much the founders may regret that fact (note that this problem can be remedied with professional help).

What does it mean to qualify for 1202 treatment of your investment?

Section 1202 was enacted in 1993 to encourage investment in small businesses. It allows individuals to avoid paying taxes on up to 100% of the taxable gain recognized on the sale of qualified small business corporation stock (sometimes referred to as QSBS).

How do I report a section 1202 stock?

Form 1099-DIV: Section 1202 gain will appear in box 2(c) of the form and will be reported on Schedule D, line 13, of your individual tax return.

How do I report a 1202 stock sale?

Reporting the Section 1202 Gain and the Exclusion

  1. Report the entire gain as a long-term gain on Line 8 of Schedule D.
  2. Enter the allowable exclusion as a loss below the entry for the gain.
  3. Label the the entry for the allowable exclusion as follows: Section 1202 exclusion.