Anyone with experience on Section 1202?

August 24, 2021
by a searcher from University of Pennsylvania - The Wharton School in Miami, FL, USA
I am working on an asset purchase deal and need to decide whether to form the new entity as an S Corp or as a C Corp for the purpose of taking advantage of the Section 1202 capital gains exemption down the road when we exit (https://rsmus.com/what-we-do/services/tax/federal-tax/corporate-tax-services/understanding-the-qualified-small-business-stock-gain-exclusion.html).
Interested to hear from any buyers who have been through this decision process and how you landed where you did. Also interested to hear from any lawyers/accountants who could share thoughts on the tradeoffs and potentially advise me on the decision.
from University of Virginia in Los Angeles, CA, USA
Two key considerations prior to making your decision: 1) are you planning on holding for more than 5 years, or are you looking to do a quicker 3-4 year flip? 2) are the returns predominately driven by proceeds upon exit, or via dividends throughout the holding period? Another important piece to think through is tax rates, and the potential of corporate and/or capital gains taxes going up... right now we believe that in either way, if you have a longer-term, growth-oriented investment where most of the gains will be realized upon exit, C-Corp is the way to go (not to say you can't also drive returns via dividends with a C-Corp). Some may push back and ask, "well doesn't PE not like to buy C-Corps so you're limiting your buyer universe?", or "well what about QBI deductions that you can only use in an LLC?", or "well don't you want the ability to pay dividends?" All of which there are answers to, but that'll take a longer post.
from New York University in New York, NY, USA