Section 1202 QSBS - Save $10 Million In Capital Gains On Your Search Exit

Hi all,

I wanted to provide some helpful information that a lot of clients have recently been asking me about when structuring their Search acquisition in regards to the Section 1202 QSBS (Qualified Small Business Stock) gains exclusion.

What is Section 1202 QSBS? Section 1202 is like a golden ticket from the IRS. It allows you to exclude up to 100% of your capital gains (the greater of up to $10 million or 10x your adjusted basis) from federal taxes when you sell qualified small business stock. Yes, you read that right – 100% tax-free gains!

Why should I care?
1) Exclude up to $10 million or 10x your basis in capital gains (whichever is greater)

2. 0% federal capital gains tax on qualifying sales
3. Potential for multiple exclusions if structured correctly
   
   How to Qualify
4. Acquire stock at original acquisition - which requires some proper deal structuring which I discuss below
5. Hold the stock for at least 5 years
6. Company must be a C-Corporation
7. Company's gross assets must be under $50 million at stock issuance
8. Company must be in an active trade or business (with some exclusions)
   
   How This Works In an M&A Transaction
   As a buyer, you usually want an asset sale - therefore, you create a C Corp holding co to acquire the assets of a target through a NewCo instead of purchasing stock directly from a seller. In an asset purchase, not only can the purchaser (You) receive a basis step-up for the target's assets, but also, if the purchaser contributes cash to a NewCo in exchange for originally issued stock and then has NewCo purchase the target assets, the NewCo stock the purchaser received may be QSBS if all the other requirements are met.
   
   Sellers may insist upon a stock sale to avoid the corporate-level tax imposed by an asset sale. In this case, the NewCo stock received by the purchaser could still be considered as QSBS even if NewCo is being used as a holding company by the purchaser to acquire target stock. Note, however, that a stock sale is unlikely to offer any asset basis step-up unless an election under Sec. 338 or Sec. 336(e) is allowed.
   
   Here's a podcast episode as well where I go into detail about it if its easier to understand by explaining it: https://podcasts.apple.com/us/podcast/in-this-episode-learn-about-how-the-irs-tax-laws-can/id1489688135?i=###-###-####
   
   PLEASE NOTE however that unfortunately it only applies to certain businesses - primarily ones that are more physical products or digital products based ie manufacturing, distribution, wholesale, SaaS, software etc and NOT service based (Excluded businesses include professional services (health, legal, engineering, architecture, accounting, actuarial, performing arts, consulting, athletics, financial (including banking and insurance), or any trade or business for which the principal asset is the reputation or skill of its employees), agriculture businesses, businesses involving mining, drilling, or extraction activities, and hospitality businesses.)
   Has anyone here leveraged Section 1202 in their deals? Share your experiences or questions below! Happy to chat more for your specific situation as well - https://calendly.com/ace-cpas/vip-acquirers
   
   #qsbs #section1202