Imagine selling your business (C-corporation only) for a gain of around $7 million and paying no taxes. That’s right – as long as you operated your business as a Qualified Small Business Corporation (QSBC) and you owned the business for more than five years, you don’t have to pay any federal income tax on the resulting gain.
Limitations on Excludable Gains
Of course, there are limitations to the excludable gain. The tax-free gain is limited to the greater of:
- Ten times the aggregate adjusted basis in the QSBC stock, or
- $10 million reduced by the amount of gains that you have already excluded in the prior years from the sale of the same QSBC stock ($5 million for married filing separate).
Definition of QSBC Stock
To be eligible, the stock you acquired must meet the following requirements of Section 1202 of the Internal Revenue Code:
- The stock must be acquired upon the original issuance or through gift/inheritance.
- The stock must be acquired in exchange for money, other property, not including stock or services.
- The corporation must be a QSBC on the date of the stock’s issuance, and substantially during the whole period, the stock is held.
Rules for the Corporation
To be eligible, the corporation must meet the following requirements:
- The corporation must be operating as a domestic C corporation.
- At least 80 percent of the corporation’s assets must be used in the active conduct of a qualified business.
- The corporation’s gross assets must not exceed $50 million before the stock is issued and immediately after the stock is issued (which includes amounts received for the stock).
Note – This blog post does not cover all the applicable rules. But we wanted to offer an idea of how this planning opportunity can provide huge tax savings. Feel free to reach out to us if you want to learn more about section 1202 capital gain exclusion.