Qualified small business stock and Section 1202 exclusion in Lacerte

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How do I report a QSB stock transaction and a section 1202 exclusion for that transaction?

Schedule D Form Instructions:

Section 1202 allows you to exclude a portion of the eligible gain on the sale or exchange of Qualified Small Business (QSB) stock. The section 1202 exclusion applies only to QSB stock held for more than 5 years. If you acquired the QSB stock on or before February 17, 2009, you can exclude up to 50% of the qualified gain. However, you can exclude up to 60% of the qualified gain on certain empowerment zone business stock. See Empowerment Zone Business Stock, later.

• If you acquired the QSB stock after February 17, 2009, and before September 28, 2010, you can exclude up to 75% of the qualified gain.
• If you acquired the QSB stock after September 27, 2010, you can exclude up to 100% of the qualified gain.

To be QSB stock, the stock must meet all of the following tests:

1. It must be stock in a C corporation (that is, not S corporation stock).
2. It must have been originally issued after August 10, 1993.
3. As of the date the stock was issued, the corporation was a domestic C corporation with total gross assets of $50 million or less (a) at all times after August 9, 1993, and before the stock was issued, and (b) immediately after the stock was issued. Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation.
4. You must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property (other than stock) or as pay for services (other than as an underwriter) to the corporation. In certain cases, you may meet this test if you acquired the stock from another person who met the test (such as by gift or inheritance) or through a conversion or exchange of QSB stock you held.
5. During substantially all the time you held the stock:
   1. The corporation was a C corporation;
   2. At least 80% of the value of the corporation's assets were used in the active conduct of one or more qualified businesses (defined next); and
   3. The corporation wasn't a foreign corporation, DISC, former DISC, regulated investment company, real estate investment trust, REMIC, FASIT, cooperative, or a corporation that has made (or that has a subsidiary that has made) a section 936 election. 

SSBIC: A specialized small business investment company (SSBIC) is treated as having met test 5b.

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Follow these steps to enter QSB transaction information:

1. Go to Screen 17, Dispositions.
2. Enter a Description.
3. Enter the Date acquired.
   • The date acquired must be after August 10, 1993 (QBS stock qualifications).
4. Enter the Date Sold.
5. Enter the Sales Price.
6. Enter the Cost or Basis.
7. Scroll down to the lower portion of the Schedule D section, locating the QBS Stock subsection
8. Using the field 1=qualified small business stock (exclusion or rollover), 2=business located in empowerment zone (exclusion only) (code 154);
   1. Enter a '1' to trigger the automatic 50% exclusion on the gain calculated on Form 8949. A code Q will be entered in column b, and the exclusion will be entered as a negative (in parentheses) in column g.  The remaining amount will flow to the Schedule D where it will be subject to the 28% tax rate, per Schedule D instructions for the 28% Rate Gain Worksheet.  The program limits the gain that qualifies for the exclusion to the greater of $10,000,000 or 10 times the basis.  If the qualified small business is located in an empowerment zone and the stock was purchased after December 21, 2000, and before February 18, 2009, and held for at least five years, the exclusion is 60%.  If the qualified small business is located in an empowerment zone and the stock was purchased after February 17, 2009, and held for at least five years, the exclusion is 75%.
   2. Enter a '2' to designate this stock transaction as eligible for the 60% or 75% exclusion.  Other limitations may apply.

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Additional Information:

Section 1202 exclusion [O] (code 139) - The program calculates the section 1202 50% exclusion when you make an entry in "1 If Qualified Small Business Stock." The program limits the gain that qualifies for the exclusion to the greater of $10,000,000 ($5,000,000 if MFS) or 10 times the basis. Other limitations may apply depending on whether the taxpayer previously disposed of stock of the same corporation under these rules in prior years or if there were basis adjustments after the stock was originally issued. Refer to IRS Code Section 1202. If one of these, or other, limitations apply, use this field to enter the appropriate amount.

That amount will print on the Form 8949, column g, and the difference between the total gain and the exclusion will carry to the Schedule D and be subject to the 28% tax rate.

Section 1045 Rollover (1=postpone entire gain or enter amount) (code 58) - IRS Code Section 1045 allows gain from the sale of qualified small business stock held for more than 6 months to be postponed if the taxpayer purchased other qualified small business stock within 60 days. Gain is recognized to the extent that the sale proceeds exceed the cost of the replacement stock. The basis of the replacement stock must be reduced by the amount of the postponed gain. To postpone the entire gain, enter 1. Otherwise, enter the appropriate amount.

Alternative Minimum Tax (AMT) - If the QSB was held for five years or greater, which Lacerte determines from the Date Acquired and Date Sold, 7% of the exclusion amount will print on Form 6251, line 13 as an Alternative Minimum Tax adjustment, which could further affect the taxpayer's tax liability.

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For more information, see here for the Schedule D instructions.