Understanding 1202 Small Business Stock: What You Need to Know

Understanding 1202 Small Business Stock: What You Need to Know

Small businesses are the backbone of the economy, and with the tax reform act of 2017, there is a new incentive for investors interested in funding these businesses. Section 1202 of the act provides a capital gains tax exemption for qualifying small business stocks. If you are looking to invest in budding small businesses, here are the things you need to know about 1202 small business stock.

What is 1202 Small Business Stock?

Section 1202 of the 2017 tax reform act created an incentive for investors to support eligible small businesses. The stock must meet certain requirements to be considered eligible for the capital gains exemption. To qualify for 1202 stock status, the small business must be a C corporation and have assets of $50 million or less before and after the issuance of the qualified small business stock.

How to Qualify for 1202 Stock Status

As mentioned above, there are specific requirements that a small business must meet to be eligible for 1202 stock status. These requirements include:

1. The small business must be a C corporation.
2. The corporation must have a minimum of 80% of its assets being used in the active conduct of its business.
3. The corporation must have gross assets of $50 million or less before and after the issuance of qualified small business stock.
4. The stock must have been acquired from the small business at its original issue and held for at least 5 years before the sale occurs.

Benefits of Investing in 1202 Small Business Stock

The primary benefit of investing in 1202 small business stock is the capital gains tax exemption. If the stock is held for at least 5 years, the investor may be able to exclude up to 100% of the capital gains tax upon sale. This means that if an investor were to sell their shares for $1 million after the qualifying holding period, they may not be subject to pay any capital gains tax on the sale. This makes investing in small businesses a more attractive option for investors seeking tax incentives.

Conclusion

Section 1202 of the 2017 tax reform act makes investing in small businesses more beneficial than ever. By investing in qualified small business stocks, investors can receive a capital gains tax exemption if the stocks are held for at least 5 years. If you are looking to invest in small businesses, be sure to check if they meet the requirements for 1202 small business stock to take full advantage of this incentive.