In this presentation Adam Sand explains how owners of qualified small businesses can achieve a tax‑free exit of up to $15 million by leveraging Internal Revenue Code Section 1202, also known as Qualified Small Business Stock (QSBS). He outlines the three core eligibility requirements—being a C‑corporation, holding stock as an eligible shareholder (individual, trust, or estate), and acquiring the shares at original issuance. He then details the holding‑period tiers: 50 % capital‑gain exclusion after three years, 75 % after four years, and a full 100 % exclusion after five years, each capped at $15 million per taxpayer. Sand discusses strategic considerations for maximizing the benefit, including structuring the entity and timing of incorporation, using vesting and original‑issuance grants, employing multi‑taxpayer approaches (e.g., spouses or family members) to multiply the exclusion, and creative transaction structures such as asset sales between entities. He warns about the importance of state conformity, potential QSBS clawbacks, and thorough due‑diligence to ensure compliance with the rules.
Chapters
Who wants to exit their company tax-free for up to $15 million? Section 1202 is investment in a small business. You invest in a business, make the 1202 election, and then you get a tax-free exit. It used to be $10 million, now it's $15 million. So here's the criteria. It does not fit for everybody. One, you have to be a C corporation. You have to be an eligible shareholder, and then you have to have a certain holding period. So C corporation, you have to be a C corporation, which a lot of folks are like, well, double taxation, that sucks. You have to be an eligible shareholder. That means you're individual, a trust, an estate in certain circumstances. So if I own an S corp, I might be able to spin up a new company and have my S corp LLC potentially own, maybe. But you have to be an original issuance holder. Well, I did taxes for a fella. He was one of the first employees, and when they issued the stock and changed it over to a C corp, he got shares as a C corp holder. Like they gave him shares in the company as one of the original founding employees. So he was an original on the original issuance of the stock. He like the first round, he was a recipient of that. So the timing has to be right. The holding period, here's the fun part. It used to be you had to hold onto the company for 5 years. And so 5 years was it, and then you could exit tax-free, but up to $10 million. Now, if you hold the company for 3 years, you can exit at 50% capital gain. Sweet, I get 50% off my income. I don't have to pay tax on 50% of that exit. Okay, but if I hold that company for 4 years, I get a 75% exclusion. If I hold on to it for 5 years, 100% capital gain exclusion up to $15 million. Pretty dope stuff. So this is an opportunity to evaluate long-term exit planning. Hey, what are my exit plans? What am I going to do with this? Should I spin up a new company? Should I sell assets in one company to another? Like there's some creative ways that you can go about this because this can apply to any business. A lot of people think it's stock companies only because that's where you see a lot of use cases of this strategy, but making sure that you are approaching that the right way. You know, deferring equity grants, investing, right, as you establish a company and saying, hey, you can get people in on the original stock issuance through vesting and making your employees kind of part of the conversation. That can also be a part of it. Multiple taxpayer play. If you have multiple, like, hey, a husband and wife, or, you know, if you're family, you can say, hey, we're just spread the love out because it's $15 million per person on the exit. So, you know, you want to say, should we involve other parties and take the multiple taxpayer approach? And then obviously reviewing your entity structure and incorporation timing, that's key as well. Really, you should be auditing your eligibility though, and making sure that the C corporation, like the fact pattern, like here's the requirements. Does your fact pattern justify that? And make sure that that fits because it's a really amazing tool. You also want to monitor state conformity or nonconformity or situations where you violate the terms and have the QSBS clawbacks, right? You want to avoid running afoul of the rules. Doing the due diligence and knowing the rules is absolutely key.
