As a business owner, it’s essential to stay informed about the various tax provisions that can impact your company’s growth and financial success. Section 1202 of the Internal Revenue Code, commonly known as the “qualified small business stock” is one of them.

What is Section 1202 Stock?

Section 1202 was introduced as part of the Small Business Job Protection Act of 1996. It was implemented to encourage investments in small businesses. It offers significant tax advantages to investors who purchase and hold qualified small business stock (QSBS) for a specific period. QSBS refers to stock issued by eligible small businesses that meet the criteria outlined by the IRS.

Listed Below is the Criteria

To Qualify for Section 1202 benefits, a business must meet several requirements:

  • Original Issuance. The stock must be acquired directly from the company upon its original issuance. Either in exchange for money, property, or services rendered.
  • C-Corporation Status. The issuing company must be a domestic C-Corp. This excludes S-Corporations and partnerships, but LLC’s can elect to be taxed as C-Corps. This would allow them to take advantage of section 1202.
  • Active trade or business. The corporation must be primarily engaged in an active trade or business, with at least 80% of its assets used in that trade or business.
  • Gross assets limit. The corporation’s gross assets at the time of issuance must not exceed $50 million.

What are the Benefits?

If all the requirements are met, then investors can enjoy a couple of tax benefits. The first benefit you can enjoy is the exclusion of gain. One of the primary benefits of Section 1202 is the potential exclusion of capital gains from the sale of qualified stock. Another advantage of section 1202 is the opportunity for tax deferral. If you reinvest the proceeds from the sale of QSBS into another small business within 60 days, you can defer taxes on the capital gains until the subsequent investment is sold or until December 31, 2026, whichever comes first. Lower tax rates is also a benefit. Even if the gain does not qualify for exclusion, section 1202 provides a reduced tax rate of QSBS gains for certain investors. The applicable rate can be as low as 28% for non-corporate taxpayers.


Section 1202 stock offers significant advantages for investors in eligible small businesses. By understanding the criteria and potential benefits, you can leverage this provision to attract investors. However, tax laws can be complex. To make sure you are compliant and optimized with your tax strategies then reach out to us through the link below.