FOUNDER GUIDE
Does My Founder Stock Qualify?
Founder stock can qualify for the Section 1202 exclusion, but it must meet specific requirements under IRC 1202(c) and 1202(d). Here are the key qualification tests.
Original Issuance Requirement
Under IRC 1202(c)(1), stock must be acquired by the taxpayer at its original issuance in exchange for money, property (other than stock), or as compensation for services provided to the corporation.
Secondary Purchases
Stock purchased from another shareholder (secondary transaction) does not meet the original issuance requirement. The stock must be issued directly by the corporation to the taxpayer.
Domestic C-Corporation Requirement
The issuing entity must be a domestic C-Corporation at the time of issuance. The corporation must also meet the qualified small business requirements under IRC 1202(d) during substantially all of the taxpayer's holding period.
LLC Conversions
If the company converted from an LLC to a C-Corp, stock issued after conversion may qualify. The holding period begins when the C-Corp stock is issued.
S-Corporation Stock
Stock issued while the corporation has an S-election in effect does not qualify as QSBS under IRC 1202(c)(1)(A).
$50 Million Gross Assets Test
Under IRC 1202(d)(1), the corporation's aggregate gross assets must not exceed $50 million at any time before and immediately after the stock issuance. Gross assets are measured by the adjusted basis of the corporation's property.
The $50 million test is applied at the time of each stock issuance. Stock issued when the corporation met this requirement can still qualify even if the corporation later exceeds $50 million in assets. However, any new stock issued after exceeding the threshold would not qualify.
Calculate Your Potential Savings
Use our calculator to estimate your federal tax savings under Section 1202.
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