IRC Section 1202 Studies

QSBS must meet several requirements as defined in IRC Section 1202 which are as follows:

• Shareholders must be individuals, trusts or estates (or partnerships/S-corporations that have any the three preceding types of partners as well as other partnerships)
• The stock must be held for more than 5 years before it is disposed.
• C-Corporate Stock must be originally issued post August 10, 1993 (for the entire period of shareholder ownership)
• The corporation must be a domestic (US) “qualified small business”
  • At all times prior to date of issue and immediately thereafter, aggregate gross assets do not exceed $50 million.
• The stock was acquired at its original issuance (directly from the corporation to the shareholder) for cash, property and/or compensation for services
• Corporation is a qualified trade or business
• The corporation satisfies an active business requirement during substantially all of the taxpayer’s holding period for the QSBS
• The corporation does not violate Section 1202’s redemption rules. Stock can fail to qualify as QSBS if the corporation
  • Redeems stock from a shareholder exceeding a de minimis amount within two years before or after issuance (which could invalidate QSBS held by the shareholder) or
  • If the corporation makes “significant redemptions” (i.e., more than 5 percent of the corporation’s total stock) exceeding a de minimis amount within one year before or after issuance (which could invalidate all QSBS of the corporation issued during such two-year time period)

Each eligible QSBS shareholder can exclude the greater of $10 Million of income from the gain of QSBS or ten times the basis of the QSBS sold per QSBS (Sale of one QSBS over multiple of years is limited to $10 Million or ten times the basis of QSBS exclusion). With proper planning, Insight can assist with expanding the benefits of the exclusion.