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THE DISTRIBUTOR’S LINK
Roman Basi
Roman Basi is the President of The Center for Financial, Legal & Tax Planning, Inc. Roman
graduated from Milliken University obtaining a Bachelor’s of Science Degree with a minor
in Psychology. He earned an MBA from Southern Illinois University with an emphasis
in Accounting and recevied his JD degree from Southern Illinois University. Roman is a
licensed CPA as well as being a licensed attorney in Illinois, Missouri and Florida and is
in high demand for his expertise in financial, legal and tax matters. His areas of expertise
include mergers and acquisitions, contracts, real estate law, tax and estate planning.
SECTION 1202 STOCK: HOW TO EXCLUDE UP TO $10
MILLION ON THE SALE OF YOUR BUSINESS! - PART 2
The title of this article is NOT a typo, that’s right...
up to $10 Million United States Dollars can be excluded
from the sale of a business if certain parameters are met.
Business owners should take note of the very important
requirements that allow the exclusion of up to $10 million
in federal tax. Section 1202 is an EXTREMELY beneficial
portion of Internal Revenue Code and so long as the
correct rules are followed, the exclusion is easy to apply.
Section 1202 is also referred to as the Small
Business Stock Gains Exclusion. The Section only applies
to qualified small business stock acquired after Sept. 27,
2010, that is held for more than five years. The Protecting
Americans from Tax Hikes (PATH) Act of 2015 was passed
by Congress and signed into law by President Obama. One
tax benefit, made permanent by the Obama presidency, is
the Small Business Stock Capital Gains Exclusion found
in Section 1202 of the Internal Revenue Code. The intent
behind Section 1202 is to provide an incentive for noncorporate
taxpayers to invest in small businesses in the
United States.
Before 2009, this provision of Section 1202 excluded
50% of capital gains from gross income. To stimulate
American small businesses, the American Recovery and
Reinvestment Act increased the exclusion rate from 50%
to 75% for stocks purchased between February 18, 2009,
and September 27, 2010. The latest revision to Section
1202 provides for 100% exclusion of any capital gains
if the acquisition of the small business stock was after
September 27, 2010. Also, the treatment of no portion of
the excluded gain is a preferential element for alternative
minimum tax (AMT) purposes. The capital gains that
are exempt from tax under this section are also exempt
CONTRIBUTOR ARTICLE
from the 3.8% net investment income (NII) tax applied to
other investment income. The amount of gain that any
shareholder can exclude under Section 1202 is limited to
either $10 million or 10 times the adjusted basis of the
stock. The taxable portion of a gain from selling a small
business stock has an assessment at the maximum tax
rate of 28%.
As previously discussed, not all small business
stocks are lucky enough to qualify for the tax breaks under
Section 1202. There are very stringent requirements that
must be followed with regards to qualified small business
stock. Those requirements are as follows.
[1] It was issued by a domestic c-corporation other
than a hotel, restaurant, financial institution, real estate
company, farm, a mining company, or business related
to law, engineering, or architecture. Note: while Section
1202 does not speak to an LLC taxed as a c-corporation,
a Private Letter ruling by the IRS allowed Section 1202
treatment for an LLC that chose to be taxed as a
c-corporation.
[2] It was initially issued after August 10, 1993 in
exchange for money, property, or as compensation for a
service that was rendered.
[3] On the date of the stock issue and immediately
thereafter, the issuing corporation had $50 million or less
in assets.
[4] The use of at least 80% of the corporation’s
assets is for the active conduct of one or more qualified
businesses.
[5] The issuing corporation does not purchase any
of the stock from the taxpayer during a four-year period
beginning two years before the issue date.
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