Section 1202 Exclusion
Section 1202 Exclusion section 1202 exclusion is a tax provision allowing individual shareholders to exclude significant capital gains from federal taxation when selling qualified small business stock.
This powerful tax benefit can save founders millions in federal taxes during a company exit.
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How Section 1202 Exclusion Works
Section 1202 is a strategic tax provision in the Internal Revenue Code that provides substantial tax benefits for shareholders of qualifying small businesses. It allows eligible shareholders to exclude up to $10 million (or 10x their stock basis) in capital gains from federal taxation when selling qualified small business stock.
To qualify, businesses must meet strict criteria, including maintaining a C corporation structure, holding stock for at least five years, and ensuring that 80% of company assets are used in active business operations. These requirements make Section 1202 a complex but potentially highly rewarding tax strategy for founders.
Key Points
- •Requires holding stock for minimum 5 years
- •Only applies to C corporations
- •Maximum exclusion is $10 million or 10x stock basis
- •Gross assets must remain under $50 million
- •Excludes service-based businesses
Frequently Asked Questions
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Understanding section 1202 exclusion is critical when navigating M&A transactions. Quantive has helped hundreds of business owners through this process.