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Often overlooked, the Section 1202 Qualified Small Business Stock gain exclusion is a powerful tool that business owners should consider when starting a new business. In essence, Section 1202 allows individuals to avoid paying taxes on up to 100% of the taxable gain recognized on the sale of a Qualified Small Business Stock (QSBS) that was issued by a C-Corporation. Specifically, the owner of eligible QSBS stock can claim an exemption of the greater of $10 million dollars or 10 times the aggregate adjusted basis of the stock at the time of issuance. The former is nothing to sniffle at, and the implications of the latter are truly staggering.
As with anything, however, it is important to read the fine print.
In order for a stock to qualify as QSBS, the following corporate criteria must be met:
Additionally, the following individual criteria must be met:
In sum, Section 1202 QSBS gain exclusion allows for significant tax savings for individuals holding qualified QSBS stock. The key is discovering ways to have multiple shareholders of the original qualified QSBS stock, usually through separate irrevocable trusts for each member of the family of the original shareholder. The Altman and Associates team is experienced in implementing estate and business succession plans that incorporate Section 1202 planning, whether the goal is to pass on already-issued QSBS stock to the next generation or to facilitate the issuance of new QSBS stock.
Contributed by James Crosland, Associate