IRC section 1202 is important because it allows taxpayers to exclude from taxation 100% of the gain from the sale or exchange of qualified small business stock (QSBS). The exclusion applies if the stock is held for more than five years. This checklist can help taxpayers make sure they are meeting the requirements for QSBS so they can take advantage of this tax benefit.
A qualified small business is generally a company that has less than $50 million in assets and meets other criteria, such as having less than 80% of its revenue come from services rendered within the United States.
To qualify for the 100% exclusion, the taxpayer must hold the stock for more than five years.
Personal service corporations are companies that provide services such as health, law, engineering, accounting, and actuarial science. They generally have more than $50 million in assets and are ineligible for the QSBS exclusion.
Stock that is part of a hedging transaction or convertible debt instrument will not qualify for the QSBS exclusion.
Companies that are engaged in farming, fishing, or forestry activities will not qualify for the QSBS exclusion.
To qualify for the QSBS exclusion, a company cannot earn more than 80% of its gross receipts from providing services to customers within the United States.
Banks, insurance companies, and other financial institutions are not eligible for the QSBS exclusion.
To qualify for the QSBS exclusion, a company must have less than $50 million in assets at the time the stock is issued.
The taxpayer must acquire the stock directly from the issuer in order to qualify for the QSBS exclusion.
In order to qualify for the QSBS exclusion, the taxpayer cannot have been an officer, director, or 10% shareholder of the company at any time during the 12 months prior to the issuance of the stock.
IRC section 1202 qualified small business stock is defined as stock in a qualifying small business that has been held for more than five years. The company must also be actively engaged in business, have less than $50 million in assets, and not be a passive investment company.
The main benefit of IRC section 1202 qualified small business stock is that it is tax-free when sold. This can be a significant savings, especially if the stock is sold after a long holding period.
Not all businesses qualify as a qualifying small business for IRC section 1202 purposes. To qualify, the company must be actively engaged in business, have less than $50 million in assets, and not be a passive investment company.
The IRC section 1202 qualified small business stock checklist is a helpful resource for taxpayers looking to qualify for the 100% exclusion on gains from the sale of qualified small business stock. The checklist outlines the requirements that must be met in order to qualify for the exclusion, including the $50 million asset limit and the prohibition on providing services within the United States. Additionally, taxpayers should be aware of the other restrictions that apply to QSBS, such as the five-year holding period and the prohibition on hedging transactions.
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