What are the Benefits of the Section 1202 Gain Exclusion?

The section 1202 gain exclusion is a provision of the Internal Revenue Code that allows taxpayers to exclude a certain amount of the gain on the sale of qualified small business stock (QSBS) from their gross income. This exclusion is beneficial to taxpayers because it allows them to keep more of their money, and can be used in conjunction with other tax benefits related to QSBS.

The exclusion is available to both individuals and corporations, and applies to the sale of QSBS that was acquired at original issue after August 10, 1993. To be eligible for the exclusion, the QSBS must be held for more than five years. The amount of gain that can be excluded depends on the holding period; for example, if the QSBS is held for more than five years, the taxpayer can exclude up to 50% of the gain from their gross income.

The section 1202 gain exclusion can be a valuable tool for taxpayers looking to invest in small businesses. It allows them to keep more of their money from the sale of QSBS, and can be used in conjunction with other tax benefits related to QSBS. This makes it an attractive option for those looking to invest in small businesses and grow their wealth over the long term.

Taxpayers who sell QSBS can take advantage of the section 1202 gain exclusion to exclude a certain amount of the gain on the sale from their gross income. To qualify for the exclusion, the stock must have been held for more than five years and must be passed along to another eligible taxpayer. The exclusion can be used in conjunction with other tax benefits related to QSBS, such as the 50% exclusion for qualified dividends.

There are some restrictions on who can take advantage of the SEC 1202 gain exclusion. The stock must be passed along to another eligible taxpayer, and the recipient must hold it for at least five more years. If the stock is sold before the five-year holding period is up, the gain will be subject to regular income taxes.

There are several other tax benefits related to QSBS that taxpayers should be aware of. For example, taxpayers who sell QSBS may be able to claim a 50% exclusion for qualified dividends. Additionally, the section 1202 gain exclusion can be used in conjunction with the capital gains tax exemption for small business stock.

The SEC 1202 gain exclusion compares favorably to similar tax exclusions available for investors. For example, the capital gains tax exemption for small business stock allows for a maximum exclusion of $10 million, while the SEC 1202 gain exclusion has no such limit. Additionally, the holding period for the SEC 1202 gain exclusion is shorter than the holding period for the capital gains tax exemption.

Investors who are considering selling QSBS should consult with a tax advisor to determine if the SEC 1202 gain exclusion is right for them. Taxpayers who sell QSBS and take advantage of the SEC 1202 gain exclusion can keep more of their money from the sale, and can use it in conjunction with other tax benefits related to QSBS. This makes the SEC 1202 gain exclusion an attractive option for those looking to invest in small businesses and grow their wealth over the long term.