Section 1202 of the Internal Revenue Code (unless otherwise noted, all “Section” references are to the Internal Revenue Code) provides that a taxpayer who acquired shares of stock in a corporation that qualify as qualified small business stock (QSBS Shares) after Sept. 27, 2010, can exclude the greater of $10 million and 10 times her basis in her QSBS Shares from income (QSBS Exclusion). Section 1202(h) provides that if a taxpayer gifts QSBS Shares to another taxpayer, the recipient should also be entitled to an additional QSBS Exclusion. A taxpayer who owns QSBS Shares can gift those shares to various types of trusts to significantly reduce income tax liability on the sale of those shares.
Generally speaking, in order for stock to qualify as QSBS Shares:
• The stock must be shares in a domestic C corporation, the aggregate gross assets of which did not exceed $50 million before and immediately after the issuance of the shares;
• the shares must have been originally issued by the corporation in exchange for money, property or services;
• the taxpayer must have held the shares for at least five years before the sale or exchange;
• at all times during the taxpayer’s holding period of the shares the corporation must have been engaged in a qualified trade or business described in §1202(e)(3); and
• the shares must not have been disqualified as QSBS Shares under various provisions of §1202.
