Qualified small business stock (QSBS) has been around with its associated tax benefits since 1993 with a rise in interest concerning section 1202–which outlines QSBS–after TCJA went into effect.
The Tax Cuts and Jobs Act, which was enacted on January 1, 2018, specifies many changes that affect both businesses and individuals. The biggest change that pertains to businesses is the permanent tax cut to corporate tax rates.
The Change in Percentage of Corporate Tax Rate
Under previous law, corporations faced a maximum 35% tax rate depending on revenue. Under TCJA, C-Corporations saw a drop in maximum tax rates to 21%. This change only applies to C-Corps, not to pass-through entities, partnerships, and S corporations.
Meanwhile, other tax cuts included in the TCJA, mostly affecting individuals, are set to expire in 2025, this corporate tax rate is permanent, barring new legislation.
This change made the formation of C-corporations more attractive to business owners. As business owners and associated investors “built out” their understanding of C-corporations and their tax structure, section 1202 of the Internal Revenue Code (IRC) got the spotlight.
How Does Section 1202 Benefit C-Corporations?
Section 1202 of the IRC lays out the benefits of qualified small business stock which includes up to a 100% exclusion of capital gains on their taxed income.
These benefits are only available to a group of businesses who meet stringent requirements and being a domestic C corporation is one of the requirements. Some other metrics to qualify a business for QSBS are:
- The company must be involved in a qualified trade or business which is outlined in section 1202.
- The company must not exceed $50,000,000 in aggregate gross-assets.
- The company must be an active business.
For new companies that meet these criteria, they can look forward to the benefit of 100% exclusion of capital gains on their taxable income upon the sale of the stock up to $10,000,000 or 10 times the adjusted basis of the stock, whichever is greater.
Looking for specific advice on QSBS and Capital Gains? Contact us to learn more.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.