Section 1202 Gain

[alanm22]

I have a client that sold his QBS under section 1202. The sale was for $6.5mil with a basis of $250k. I was under the impression that the gain would be excluded by 50%. So taxes would be paid on $3.125mil. In doing more research I see that there is a $10mil and $5mil exclusion on section 1202 gains. Can any help me out? Is it the 50% exclusion or is it $10mil or $5mil?

[Kathi_at_Intuit]

I would take a look at publication 550 chapter 4 as this may help:

https://www.irs.gov/pub/irs-pdf/p550.pdf

@itonewbie are you able to help out here?

[George4Tacks · Accepted solution]

https://www.irs.gov/pub/irs-pdf/p544.pdf

Exclusion of gain. You may be able to exclude from your gross income 50% of your gain from the sale or exchange of qualified small business stock you held more than 5 years. The exclusion can be up to 75% for stock acquired after February 17, 2009, and up to 100% for stock acquired after September 27, 2010. The exclusion can be up to 60% for certain empowerment zone business stock. 

Your gain from the stock of any one issuer that is eligible for the exclusion is limited to the greater of the following amounts. 

• Ten times your basis in all qualified stock of the issuer you sold or exchanged during the year. • $10 million ($5 million for married individuals filing separately) minus the gain from the stock of the same issuer you used to figure your exclusion in earlier years. 

More information. For more information on sales of small business stock, see chapter 4 of Pub. 550. See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for information on how to report the gain.

[Kathi_at_Intuit]

@George4Tacks thank you so much for helping out!

[alanm22]

I really appreciate the help but I am still a bit confused. Ten times the basis would be $250k. The gain would be $6.25mil. There have been no prior year exclusions. Since this is return is married filing joint would the entire gain be excluded since it is less than the $10 mil exclusion? Would is just be 50% of the $6.25mil gain based on when the stick was purchased. Thanks!

[itonewbie]

You may want to assess the tax impact especially if the stocks qualify only for 50% exclusion though as 7% of the amount excluded is a TPI for AMT and the gain is taxable at a maximum of 28%.

[Kathi_at_Intuit]

@itonewbie thank you also, appreciate it.

[itonewbie]

NP :smile:

[alanm22]

I really appreciate the help but I am still a bit confused. Ten times the basis would be $250k. The gain would be $6.25mil. There have been no prior year exclusions. Since this is return is married filing joint would the entire gain be excluded since it is less than the $10 mil exclusion? Would is just be 50% of the $6.25mil gain based on when the stick was purchased. Thanks!

[George4Tacks]

"Ten times the basis would be $250k"? Methinks 10 X 250K is 2,500,000

Married? $10,000,000 - 0 (assumes no prior) = $10,000,000

Larger is 10,000,000

Gain is 6,500,000 - 250.000= 6,250,000

1/2 the gain is 3,125,0000 on the "stick."

[alanm221]

I totally understand the numbers. I just don’t understand where the $10mil exclusion comes into play. Shouldn’t the exclusion be the total gain since it is higher than $6.2mil gain? Thanks

[George4Tacks]

Notice the beginning of the statement - You can exclude some % (probably 50%) UP TO those other limits.
You are paying big bucks for some software. What does the software tell you? What software is it?

[alanm22]

Turbo Tax Pro Series. It is calculating it exactly as you said. I thought it was accurate, The issue is the client is hearing from other accountants about a $10mil exclusion. Since this is a large amount I was just trying to confirm what I already thought was correct. Appreciate the help

[itonewbie]

@alanm22 What exactly is Turbo Tax Pro Series?

[alanm22]

Intuit Pro Series

[itonewbie]

Ah, I see.