Qualified Small Business Stock: Some Interesting Questions – Foley & Lardner LLP

by | Jun 29, 2022 | Business

Section 12021 is a once-obscure tax saving provision that has come into prominence in the last few years. Originally passed in 1993 as a 50% capital gain exclusion, it has been amended several times since. In its current iteration, Section 1202 allows for a 100% capital gain exclusion for the sale of qualified small business (QSB) stock (QSBS), if its requirements are met, and subject to caps.
One important requirement is that the issuing company must be a domestic C corporation. After the 2017 Tax Act, which substantially cut the U.S. federal corporate tax rate to 21% (from 35%), using a C corporation for a new business has become far more popular. In sum, the current tax climate can making an investment in a C corporation very tax efficient if the investment is in QSBS.
We consider some issues to consider regarding the qualification.
Can Section 1202 be used to buy out another company, and even a foreign company?
Section 1202 requires that the issuing corporation be incorporated domestically,2 and for it to be actively engaged in a qualified trade or business,3 among other requirements. For this purpose, the statute allows the issuing corporation to look-through to a corporate subsidiary to meet this active trade or bus …

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