Gain Exclusion for Section 1202 Stock
The decrease in the corporate tax rate by the 2017 Tax Act has made it more favorable for businesses to operate as C corporations. With more businesses opting to be C corporations, the gain exclusion of Section 1202 is more important. Section 1202 provides an exemption to eligible taxpayers of between 50% and 100% of the gain of the sale of Section 1202 stock.
Section 1202 applies only to qualified small business stock held for more than five years. Qualified small business stock is stock of a C corporation that was issued on or after August 10, 1993, if (a) as of the date of issuance, the corporation was a qualified small business, and (b) the stock was acquired by the taxpayer at its original issue (subject to narrow exceptions). A qualified small business is a U.S. corporation that is a C corporation and the aggregate gross assets of which at all times after August 10, 1993, and before and immediately after issuance did not exceed $50 million. Additionally, the corporation must meet an active business requirement. At least 80% by value of the assets of the corporation must be used in the active conduct of one or more qualified trades or businesses. A qualified trade or business is any trade or business other than the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, or financial services, any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, banking, insurance, financing, leasing, investing, or similar business, any farming business (including raising or harvesting trees), any business involving the production or extraction of products to which a deduction is allowable under Section 613 or 613A, or operating a hotel, motel, restaurant, or similar business.