Maximizing tax savings with Section 1202: Qualified small business stock exclusion

Navigate QSBS requirements for business owners

The Section 1202 Qualified Small Business Stock (QSBS) exemption offers business owners a significant opportunity to reduce or even eliminate their tax liability on the sale of eligible stock. Whether you’re starting a new business, looking for new investment opportunities, considering a sale of your business, or rethinking your existing structure, you may stand to take advantage of Section 1202.

However, navigating Section 1202 rules can be complex, so it’s crucial to have the benefit of experience on your side. IRS guidance on the QSBS exemption is limited, and many of the requirements leave room for interpretation by taxpayers and the IRS. Taxpayers may also run into limitations under Section 1202, but thoughtful tax planning can minimize the impact of the limitations and maximize the tax benefits for selling shareholders.

Our Section 1202 tax specialists offer strategic guidance on how to navigate QSBS requirements. Explore our latest on Section 1202 and implementing the exclusion into your tax planning strategy.

Maximize the tax benefits of Section 1202

Explore our solutions for the QSBS exemption below.

Entity-choice analysis

We can help you determine the best tax classification to meet your objectives when the Section 1202 qualifications are expected to be met. This can include high-level discussions or detailed tax modeling.

Entity-level study

Our tax specialists will help you determine if your company meets the criteria of Section 1202. We’ll provide a report with all the entity-level information each shareholder needs to support their exclusion.

Exit planning & structuring

When looking at an exit, it’s important that the structure realizes the Section 1202 benefit you’re expecting. We’ll help you implement a sale strategy that optimizes your tax savings. Beyond basic qualification, you may be able to multiply your savings by structuring the sale over multiple tax years or strategically selecting which shares to sell versus rollover.

Flow-thru analysis

When a Section 1202 company is owned by a flow-through entity (partnership or S corporation), flow-through entities and the individual must navigate an additional layer of rules. We can help owners to understand the anticipated allocation of QSBS gain.

Individual-level study

We’ll review and document the individual-level requirements for each shareholder. To the extent a sale has occurred, we’ll determine the gain exclusion and prepare the sale presentation for the individual’s tax return.

Investment structuring

Engaging in proactive planning for Section 1202 at the outset can help ensure you’re enhancing return on investment for your shareholders. We can assist you with setting up your new entity or structuring your acquisition to meet Section 1202 requirements while avoiding pitfalls related to allocations in tiered ownership structures. Our summary on initial findings will address the initial QSBS qualification and identify important planning considerations to address through the holding period so you can achieve the optimal tax results.

Life-cycle monitoring

We can assist with annual documentation of eligibility for Section 1202 requirements to provide transparency of QSBS positions over the life of the investment. This may include supporting calculations at all relevant points throughout the life of the corporation and reviewing new business lines.