Recent Changes to IRC § 1202 Small Business Stock Gains Exclusion

In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) was passed by Congress and signed into law and with it made certain tax breaks permanent, including IRC § 1202, the Small Business Stock Gains Exclusion.

For qualified small business stocks (QSBS) acquired after September 27, 2010 and held for more than 5 years there is an exclusion of 100 percent of the gain on the sale or exchange of QSBS;  QSBS gain exclude from income is not subject to the 3.8 percent Medicare tax on “Net Investment Income” from capital gains.  The act also eliminates the 100 percent excluded QSBS gain as a preference item for alternative minimumtTax purposes.

For a stock to qualify for this exclusion, it must be issued by a C corporation other than the following corporations:

  • DISC
  • Regulated investment company
  • Real estate investment trust
  • Real estate mortgage investment conduit
  • Financial asset securitization investment trust
  • A cooperative; or
  • A corporation electing the Puerto Rico and possession tax credit.

A cumulative limit on the gain from a single issuer that a taxpayer can exclude is set to the greater of: (1) $10 million reduced by the aggregate amount of eligible gain in prior years from the same issuer; or (2) 10 times the adjusted basis of all qualified stock of the issuer that the taxpayer disposed of during the tax year.