Section 1202 Exclusion Example: What You Need to Know
The Section 1202 exclusion example is a provision in the new tax law that allows businesses to exclude from their taxable income up to 80% of the gain on the sale of certain qualifying small business stock (QSBS). This provision is effective for sales of QSBS acquired after December 31, 2017, and is retroactive to sales made after September 27, 2010. In this article, we will be discussing what you need to know about the Section 1202 exclusion example. This is a great way to learn more about how the section works and how it can benefit you.
The Section 1202 exclusion allows for the gain from the sale of certain small business stock to be excluded from your taxable income. This provision is designed to help promote investment in small businesses. To qualify for the exclusion, the stock must be issued by a qualifying small business. The business must also meet certain other requirements, such as being engaged in a qualified trade or business and having gross assets of $50 million or less.
If you sell your QSBS for a profit, you may be able to exclude up to 80% of the gain from your taxable income. This can be a significant tax savings for investors in small businesses. The Section 1202 exclusion is a great way to encourage investment in small businesses and help them grow. If you are thinking about investing in a small business, be sure to check if the business qualifies for the exclusion. It could save you a lot of money in taxes.
What are the requirements for a qualifying small business
For qualifying small business stock, the stock must be issued by a domestic C corporation that meets the following requirements:
- The corporation is engaged in a qualified trade or business. This is generally any business other than a financial institution, farming, or natural resources extraction. Section 1202(e)(3) of the tax code defines a qualified trade or business for this purpose.
- The corporation is not a publicly traded company. This means that the stock cannot be listed on a major stock exchange.
- The stock is acquired by the taxpayer at original issuance in exchange for money, property (not including stock), or services rendered to the corporation.
- The corporation must issue the stock for cash, property (not including stock), or services rendered to the corporation.
- The corporation must be a C corporation at the time the stock is issued.
- During substantially all of the taxpayer’s holding period, the corporation must meet the active business requirement. This means that at least 80% of the value of the corporation’s assets must be used in the active conduct of a qualified trade or business.
If the stock meets all of the above requirements, then the taxpayer may exclude up to 80% of the gain on the sale of the stock from their taxable income. This exclusion can be a powerful tool for investors in small businesses, as it can significantly reduce their tax liability.
It’s important to note that the exclusion is only available for sales of QSBS that are held for more than five years. Additionally, the exclusion is subject to a number of limitations and restrictions, so it’s important to consult with a tax advisor before taking advantage of this provision.