Many investors in early-stages companies plan to take advantage of the exclusion from federal taxable income of gain realized from the sale or exchange of "qualified small business stock" (QSB stock) under Section 1202 of the Internal Revenue Code (the Code). The Section 1202 exclusion for QSB stock provides a powerful federal tax incentive and can be a significant factor in investment decisions by venture capitalists and other non-corporate investors. Section 1202 permits non-corporate stockholders to exclude from federal taxable income a portion of the gain realized from the sale or exchange of QSB stock held for more than five years, subject to certain caps described in this blog post. Even though gain may be excluded for federal income tax purposes, stockholders should be aware that the state tax treatment may differ, and a stockholder might be subject to state taxes on the sale or exchange of QSB stock even where federal income taxes do not apply.
This blog post highlights important takeaways for stockholders planning to take advantage of the exclusion from federal taxable income of gain realized from the sale or exchange of QSB stock and discusses notable irregularities in state tax laws that investors should watch out for. We are happy to answer questions you have about eligibility for QSB stock treatment and state tax treatment of QSB stock.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
