ELIGIBILITY CHECK
How to Qualify for QSBS
To claim the Section 1202 exclusion, both the corporation and the stockholder must meet specific requirements under the Internal Revenue Code.
IRC 1202 has requirements at both the corporate level (the issuing corporation must be a "qualified small business") and the shareholder level (how and when the stock was acquired).
1. Domestic C-Corporation [IRC 1202(c)(1)]
The stock must be issued by a domestic C-Corporation. Stock issued by S-Corporations, LLCs taxed as partnerships, or foreign corporations does not qualify.
2. Gross Assets Test [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 adjusted basis.
3. Active Business Requirement [IRC 1202(e)]
At least 80% of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses.Certain businesses are excluded under IRC 1202(e)(3), including services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage.
4. Original Issuance [IRC 1202(c)(1)(B)]
The taxpayer must acquire the stock at original issuance in exchange for money, property (other than stock), or as compensation for services. Stock purchased from another shareholder does not qualify.
5. Holding Period [IRC 1202(a)]
The stock must be held for more than 5 years. For stock options, the holding period begins at exercise. See our ISO exercise guide for details.
Pass all 5 tests?
Run the numbers to see how much tax you save.