In his article, William J. Sanders summarizes recent amendments to the 1986 Internal Revenue Code that significantly open up the tax savings opportunities under section 1202. Sanders explains,

Section 1202, which was originally added to the Code in 1993, provides relief from federal taxation for investors in small businesses. In particular, Section 1202 allows a portion of gains—or in some cases, all gains—from the sale or exchange of certain Qualified Small Business Stock (QSBS) that has been held by a non-corporate taxpayer for more than five years to be excluded from federal taxation.

In its original form, Section 1202 provided an exclusion for 50 percent of gains from the sale or exchange of QSBS acquired after Aug. 10, 1993. This amount was increased in 2009 to 75 percent for gains derived from the sale or exchange of QSBS acquired after Feb. 17, 2009. In 2010, the amount eligible for exclusion was increased again to 100 percent of gains from the sale or exchange of QSBS acquired after Sept. 27, 2010. While Congress originally intended the 100 percent exclusion to be temporary, the PATH (Protecting Americans from Tax Hikes) Act, passed in December 2015, permanently extended the 100 percent exclusion for QSBS acquired after Sept. 27, 2010. The following table illustrates the current regime of exclusions under Section 1202 following the passage of the PATH Act:

Date of Acquisition Amount of Exclusion
After Aug. 10, 1993 – Before Feb. 18, 2009 50%
After Feb. 17, 2009 – Before Sept. 28, 2010 75%
After Sept. 27, 2010 100%

Though the remaining percentage of gains not excluded is taxed at 28 percent rather than the standard capital gains rate, the recent changes to Section 1202 still afford significant savings to small business investors. The PATH Act also resolved issues related to the alternative minimum tax (AMT) that previously limited the utility of Section 1202, allowing taxpayers subject to the AMT to retain the advantages provided by Section 1202.

Find the full opinion here: Small Business Investors Can Save Big with New IRS Code Amendments

Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal