26 USC 1202 - Partial exclusion for gain from certain small business stock

U.S Code last checked for updates: Nov 22, 2024

§ 1202.

Partial exclusion for gain from certain small business stock

(a)

Exclusion

(1)

In general

(2)

Empowerment zone businesses

(A)

In general

(B)

Certain rules to apply

(C)

Gain after 2018 not qualified

(D)

Treatment of DC zone

(3)

Special rules for 2009 and certain periods in 2010

In the case of qualified small business stock acquired after the date of the enactment of this paragraph and on or before the date of the enactment of the Creating Small Business Jobs Act of 2010—

(A)

paragraph (1) shall be applied by substituting “75 percent” for “50 percent”, and

(B)

paragraph (2) shall not apply.

In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for purposes of this subsection shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223.

(4)

100 percent exclusion for stock acquired during certain periods in 2010 and thereafter

In the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010—

(A)

paragraph (1) shall be applied by substituting “100 percent” for “50 percent”,

(B)

paragraph (2) shall not apply, and

(C)

paragraph (7) of section 57(a) shall not apply.

(b)

Per-issuer limitation on taxpayer’s eligible gain

(1)

In general

If the taxpayer has eligible gain for the taxable year from 1 or more dispositions of stock issued by any corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account under subsection (a) for the taxable year shall not exceed the greater of—

(A)

$10,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation, or

(B)

10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year.

For purposes of subparagraph (B), the adjusted basis of any stock shall be determined without regard to any addition to basis after the date on which such stock was originally issued.

(2)

Eligible gain

(3)

Treatment of married individuals

(A)

Separate returns

(B)

Allocation of exclusion

(C)

Marital status

(c)

Qualified small business stock

For purposes of this section—

(1)

In general

Except as otherwise provided in this section, the term “qualified small business stock” means any stock in a C corporation which is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993, if—

(A)

as of the date of issuance, such corporation is a qualified small business, and

(B)

except as provided in subsections (f) and (h), such stock is acquired by the taxpayer at its original issue (directly or through an underwriter)—

(i)

in exchange for money or other property (not including stock), or

(ii)

as compensation for services provided to such corporation (other than services performed as an underwriter of such stock).

(2)

Active business requirement; etc.

(A)

In general

(B)

Special rule for certain small business investment companies

(i)

Waiver of active business requirement

(ii)

Specialized small business investment company

(3)

Certain purchases by corporation of its own stock

(A)

Redemptions from taxpayer or related person

(B)

Significant redemptions

(C)

Treatment of certain transactions

(d)

Qualified small business

For purposes of this section—

(1)

In general

The term “qualified small business” means any domestic corporation which is a C corporation if—

(A)

the aggregate gross assets of such corporation (or any predecessor thereof) at all times on or after the date of the enactment of the Revenue Reconciliation Act of 1993 and before the issuance did not exceed $50,000,000,

(B)

the aggregate gross assets of such corporation immediately after the issuance (determined by taking into account amounts received in the issuance) do not exceed $50,000,000, and

(C)

such corporation agrees to submit such reports to the Secretary and to shareholders as the Secretary may require to carry out the purposes of this section.

(2)

Aggregate gross assets

(A)

In general

(B)

Treatment of contributed property

(3)

Aggregation rules

(A)

In general

(B)

Parent-subsidiary controlled group

For purposes of subparagraph (A), the term “parent-subsidiary controlled group” means any controlled group of corporations as defined in section 1563(a)(1), except that—

(i)

“more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)(1), and

(ii)

section 1563(a)(4) shall not apply.

(e)

Active business requirement

(1)

In general

For purposes of subsection (c)(2), the requirements of this subsection are met by a corporation for any period if during such period—

(A)

at least 80 percent (by value) of the assets of such corporation are used by such corporation in the active conduct of 1 or more qualified trades or businesses, and

(B)

such corporation is an eligible corporation.

(2)

Special rule for certain activities

For purposes of paragraph (1), if, in connection with any future qualified trade or business, a corporation is engaged in—

(A)

start-up activities described in section 195(c)(1)(A),

(B)

activities resulting in the payment or incurring of expenditures which may be treated as research and experimental expenditures under section 174, or

(C)

activities with respect to in-house research expenses described in section 41(b)(4),

assets used in such activities shall be treated as used in the active conduct of a qualified trade or business. Any determination under this paragraph shall be made without regard to whether a corporation has any gross income from such activities at the time of the determination.

(3)

Qualified trade or business

For purposes of this subsection, the term “qualified trade or business” means any trade or business other than—

(A)

any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees,

(B)

any banking, insurance, financing, leasing, investing, or similar business,

(C)

any farming business (including the business of raising or harvesting trees),

(D)

any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A, and

(E)

any business of operating a hotel, motel, restaurant, or similar business.

(4)

Eligible corporation

For purposes of this subsection, the term “eligible corporation” means any domestic corporation; except that such term shall not include—

(A)

a DISC or former DISC,

(B)

a regulated investment company, real estate investment trust, or REMIC, and

(C)

a cooperative.

(5)

Stock in other corporations

(A)

Look-thru in case of subsidiaries

(B)

Portfolio stock or securities

(C)

Subsidiary

(6)

Working capital

For purposes of paragraph (1)(A), any assets which—

(A)

are held as a part of the reasonably required working capital needs of a qualified trade or business of the corporation, or

(B)

are held for investment and are reasonably expected to be used within 2 years to finance research and experimentation in a qualified trade or business or increases in working capital needs of a qualified trade or business,

shall be treated as used in the active conduct of a qualified trade or business. For periods after the corporation has been in existence for at least 2 years, in no event may more than 50 percent of the assets of the corporation qualify as used in the active conduct of a qualified trade or business by reason of this paragraph.

(7)

Maximum real estate holdings

(8)

Computer software royalties

(f)

Stock acquired on conversion of other stock

If any stock in a corporation is acquired solely through the conversion of other stock in such corporation which is qualified small business stock in the hands of the taxpayer—

(1)

the stock so acquired shall be treated as qualified small business stock in the hands of the taxpayer, and

(2)

the stock so acquired shall be treated as having been held during the period during which the converted stock was held.

(g)

Treatment of pass-thru entities

(1)

In general

If any amount included in gross income by reason of holding an interest in a pass-thru entity meets the requirements of paragraph (2)—

(A)

such amount shall be treated as gain described in subsection (a), and

(B)

for purposes of applying subsection (b), such amount shall be treated as gain from a disposition of stock in the corporation issuing the stock disposed of by the pass-thru entity and the taxpayer’s proportionate share of the adjusted basis of the pass-thru entity in such stock shall be taken into account.

(2)

Requirements

An amount meets the requirements of this paragraph if—

(A)

such amount is attributable to gain on the sale or exchange by the pass-thru entity of stock which is qualified small business stock in the hands of such entity (determined by treating such entity as an individual) and which was held by such entity for more than 5 years, and

(B)

such amount is includible in the gross income of the taxpayer by reason of the holding of an interest in such entity which was held by the taxpayer on the date on which such pass-thru entity acquired such stock and at all times thereafter before the disposition of such stock by such pass-thru entity.

(3)

Limitation based on interest originally held by taxpayer

(4)

Pass-thru entity

For purposes of this subsection, the term “pass-thru entity” means—

(A)

any partnership,

(B)

any S corporation,

(C)

any regulated investment company, and

(D)

any common trust fund.

(h)

Certain tax-free and other transfers

For purposes of this section—

(1)

In general

In the case of a transfer described in paragraph (2), the transferee shall be treated as—

(A)

having acquired such stock in the same manner as the transferor, and

(B)

having held such stock during any continuous period immediately preceding the transfer during which it was held (or treated as held under this subsection) by the transferor.

(2)

Description of transfers

A transfer is described in this subsection if such transfer is—

(A)

by gift,

(B)

at death, or

(C)

from a partnership to a partner of stock with respect to which requirements similar to the requirements of subsection (g) are met at the time of the transfer (without regard to the 5-year holding period requirement).

(3)

Certain rules made applicable

(4)

Incorporations and reorganizations involving nonqualified stock

(A)

In general

(B)

Limitation

(C)

Successive application

(D)

Control test

(i)

Basis rules

For purposes of this section—

(1)

Stock exchanged for property

In the case where the taxpayer transfers property (other than money or stock) to a corporation in exchange for stock in such corporation—

(A)

such stock shall be treated as having been acquired by the taxpayer on the date of such exchange, and

(B)

the basis of such stock in the hands of the taxpayer shall in no event be less than the fair market value of the property exchanged.

(2)

Treatment of contributions to capital

(j)

Treatment of certain short positions

(1)

In general

If the taxpayer has an offsetting short position with respect to any qualified small business stock, subsection (a) shall not apply to any gain from the sale or exchange of such stock unless—

(A)

such stock was held by the taxpayer for more than 5 years as of the first day on which there was such a short position, and

(B)

the taxpayer elects to recognize gain as if such stock were sold on such first day for its fair market value.

(2)

Offsetting short position

For purposes of paragraph (1), the taxpayer shall be treated as having an offsetting short position with respect to any qualified small business stock if—

(A)

the taxpayer has made a short sale of substantially identical property,

(B)

the taxpayer has acquired an option to sell substantially identical property at a fixed price, or

(C)

to the extent provided in regulations, the taxpayer has entered into any other transaction which substantially reduces the risk of loss from holding such qualified small business stock.

For purposes of the preceding sentence, any reference to the taxpayer shall be treated as including a reference to any person who is related (within the meaning of section 267(b) or 707(b)) to the taxpayer.

(k)

Regulations

(Added Pub. L. 103–66, title XIII, § 13113(a), Aug. 10, 1993, 107 Stat. 422; amended Pub. L. 104–188, title I, § 1621(b)(7), Aug. 20, 1996, 110 Stat. 1867; Pub. L. 106–554, § 1(a)(7) [title I, § 117(a), (b)(2)], Dec. 21, 2000, 114 Stat. 2763, 2763A–604; Pub. L. 108–357, title VIII, § 835(b)(9), Oct. 22, 2004, 118 Stat. 1594; Pub. L. 111–5, div. B, title I, § 1241(a), Feb. 17, 2009, 123 Stat. 342; Pub. L. 111–240, title II, § 2011(a), (b), Sept. 27, 2010, 124 Stat. 2554; Pub. L. 111–312, title VII, §§ 753(b), 760(a), Dec. 17, 2010, 124 Stat. 3321, 3323; Pub. L. 112–240, title III, §§ 324(a), (b), 327(b), Jan. 2, 2013, 126 Stat. 2333, 2334; Pub. L. 113–295, div. A, title I, § 136(a), Dec. 19, 2014, 128 Stat. 4019; Pub. L. 114–113, div. Q, title I, § 126(a), Dec. 18, 2015, 129 Stat. 3054; Pub. L. 115–141, div. U, title IV, § 401(d)(1)(D)(xv), (4)(B)(v), Mar. 23, 2018, 132 Stat. 1208, 1209.)

cite as: 26 USC 1202