If you’ve started your own business since 1993, and funded it with your own money as a C Corporation there could be some valuable tax savings if you’re planning on selling the company. This comes in the form of the section 1202 exclusion.
The Section 1202 exclusion allows a person to exclude up to 100% of the gain on the sale of qualified small business stock (QSBS) that has been held more than five years.
The amount available to be excluded varies depending on when the business was started and funded. If the corporation was started between Aug 10, 1993 and Feb 17, 2009, 50% is excludable; if between Feb. 17, 2009 and Sept 27, 2010, 75%; and if you were lucky enough to start the corporation between Sept 27, 2010 and before Jan 1, 2014 100% of the gain is excluded.
So what are the catches? The taxable portion of the gain is taxed at 28% (excluding the possible Medicare investment tax of 2.8%) as opposed to the regular long term capital gain rate of 20%. The maximum amount of gain that can be excluded is the greater of $10 million of 10 times the taxpayer’s basis in the stock. Further, QSBS is defined as a C Corporation that the taxpayer funded directly with no more than $50 million of gross assets, 80% of its assets must be in an active trade or business, the corporation cannot own real property or stock/securities exceeding 10% of its total assets, and stock/securities cannot exceed 10% of its total assets in excess of its liabilities.
As you have read the 1202 exclusion can save a lot of money, but there are many complexities not outlined above including possible alternative minimum taxes. All the more reason to contact a CPA!