Accounting and Tax Updates

General Discussion
Section 1202 - Beneficial Taxes for Early Stage Investors
By Jeffrey Solomon, Nov. 28th, 2016

For taxpayers that start or invest in early stage companies, Congress has a gift that many are not aware that they have been provided with. This gift, if you qualify, may allow you to eliminate all or a portion of a gain when you sell your stock in an early stage corporation. However, your investment must qualify and follow certain guidelines. The code section that applies is Code Section 1202-b of the Internal Revenue Code. A company’s 1202 stock, or qualified small business stock, is stock in a C corporation that:


  • Has no more than $50 million in gross assets at the time of issue
  • Has 80% of its assets used in an active trade or business and is held by a non-corporate taxpayer
  • Was issued after August 10, 1993 and was “original issue”


If the stockholder owns the stock for greater than 5 years, then all or most of the gain on the subsequent sale of stock can be excluded. The amount excluded is the greater of $10 million or 10× the stockholder’s basis.

The exclusion percent amount may vary based on rules Congress had in place at the time that the taxpayer received the stock. However, all new startups in 2016 that issue stock that qualifies will be able to offer their investors 100% of exclusions.


The rules are a bit complicated and may require alternative minimum tax add backs for the stockholder.  If the stock is not “original issue”, one must determine proper holding periods and whether or not it may qualify. Stock held through an LLC or partnership also will allow the member or partner to use the benefit of 1202 in C corp as it flows through to the end holder of the stock. Please give KN+S a ring at 781-453-8700 for further information.  Article by Jeffrey D. Solomon, CPA, CVA