IRS CODE EXPLAINED
The Section 1202 Exclusion
IRC Section 1202 provides a partial exclusion from gross income for gain from the sale of qualified small business stock (QSBS) held for more than five years.
The Exclusion
Under IRC 1202(a), taxpayers may exclude a percentage of gain realized on the sale of QSBS held for more than five years. The exclusion percentage depends on when the stock was acquired.
- Exclusion Amount: Up to 100% of qualifying gain (for stock acquired after September 27, 2010)
- Per-Issuer Limit: Greater of $10 million or 10 times the adjusted basis of stock in the corporation [IRC 1202(b)(1)]
- Holding Period: More than 5 years from the date of issuance [IRC 1202(a)(1)]
Exclusion Percentage by Acquisition Date
The exclusion percentage under IRC 1202(a) depends on when the QSBS was acquired:
| Acquisition Date | Exclusion | Code Reference |
|---|---|---|
| After September 27, 2010 | 100% | IRC 1202(a)(4) |
| February 18, 2009 – September 27, 2010 | 75% | IRC 1202(a)(3) |
| August 11, 1993 – February 17, 2009 | 50% | IRC 1202(a)(1) |
State Tax Considerations
Section 1202 is a federal provision. State conformity varies.
Several states do not conform to IRC 1202, including California, Pennsylvania, New Jersey, and Mississippi. In non-conforming states, gain that is excluded for federal purposes may still be subject to state income tax.
Questions About Your Situation?
IRC 1202 eligibility depends on specific facts and circumstances. Consider consulting a tax professional to review your stock and holding period.
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