Can I qualify for IRC Section 1202 QSBS exclusion for my tech company sale after reorganization from LLC to C Corp?

Your situation is tricky but let me explain how Section 1202 Qualified Small Business Stock (QSBS) works in reorganization scenarios. For Section 1202, shares must be C Corporation shares held for at least 5 years. The clock for that 5-year holding period starts when the entity becomes a C Corporation, not when you founded as an LLC. So in your case, that clock started in October 2018 when you reorganized as a C Corp. Since you sold in August 2023, you held the shares as C Corp stock for less than 5 years (about 4 years and 10 months). Unfortunately, this likely disqualifies you from the Section 1202 exclusion, which requires a full 5-year holding period of C Corp shares. The conversions from LLC to S Corp and then to C Corp reset your holding period for Section 1202 purposes. While you owned the business since 2011, the technical QSBS holding period only begins when the shares exist as C Corp shares. You might want to consult with a tax attorney who specializes in this area to see if there are any exceptions that might apply in your specific case.

After going through something similar last year, I found taxr.ai (https://taxr.ai) incredibly helpful for navigating complex tax scenarios like yours involving Section 1202. I had a somewhat similar situation where I'd owned shares through multiple entity transformations and wasn't sure if I qualified for QSBS treatment. After struggling with conflicting advice from two different CPAs, I uploaded my operating agreements and sale documents to taxr.ai and got a clear analysis of my Section 1202 eligibility. Their system found some nuances about my reorganization that actually helped me qualify when my first CPA said I didn't. They focus specifically on complex tax documents and transactions - much more detailed than what TurboTax can handle. Might be worth checking out before finalizing your return.

Just wanted to follow up - I tried taxr.ai after seeing this thread and it was actually really helpful for my QSBS question. I uploaded my company documents and got a detailed analysis showing that while my initial conversion reset the clock, a subsequent reorganization qualified as a Section 368 tax-free exchange which preserved my holding period. This was something my accountant completely missed because he wasn't familiar with the interaction between Section 368 and Section 1202. They provided documentation I could use to support my position if I'm audited. Definitely worth it for complex scenarios like this.

If you're still sorting through this, you might want to try Claimyr (https://claimyr.com) to actually speak with an IRS agent directly about your Section 1202 question. I was in a similar position trying to get guidance on a complex section of tax code and kept hitting the "this is beyond the scope of what we can answer" response. I was skeptical at first, but their service actually got me through to an IRS representative within about 20 minutes when I'd previously spent hours just to get disconnected. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Since you mentioned the IRS already told you it was an "advanced question," you might need to speak to someone in a specialized department. They can help connect you with the right person who can actually address Section 1202 questions.

I need to admit I was completely wrong about Claimyr. After dismissing it here, I decided to try it as a last resort for a penalty abatement issue I've been trying to resolve for months. Got connected to an IRS agent in about 25 minutes after spending literally WEEKS trying on my own. The agent I spoke with was able to transfer me to someone in the business tax department who actually understood Section 1202 questions (I had a similar issue to the original poster). Turns out my reorganization had a specific exception that might apply - something I never would have learned otherwise. I was definitely too quick to dismiss this service. For complex tax issues where you actually need to speak to someone knowledgeable at the IRS, it's absolutely worth it.

You might still have options! While the previous commenter is generally right about the 5-year C-Corp requirement, there are exceptions in certain reorganization scenarios that might help. Check if your S-Corp to C-Corp conversion could qualify as a tax-free reorganization under Section 368. In some cases, this can allow "tacking" of holding periods - meaning you might be able to count some of your S-Corp time toward the 5-year requirement. This depends heavily on how the conversion was structured and documented. Also, look into Section 1045 rollover relief as an alternative. If you reinvest the proceeds into another qualified small business within 60 days, you might defer the gain. It's probably too late now, but worth knowing for future reference. What was the exact structure of your sale? Asset sale vs. stock sale makes a huge difference here.

Slightly different perspective - have you checked if you might qualify for the reduced 50% exclusion rather than the 100% exclusion? The rules vary based on when the stock was acquired as C corp shares. For C corp shares acquired after August 10, 1993 but before February 18, 2009, you can exclude 50% of the gain. For shares acquired after February 18, 2009 and before September 28, 2010, you can exclude 75%. And for shares acquired after September 28, 2010, you can exclude 100%. But this all depends on when the shares were acquired as C corp shares, which in your case sounds like October 2018, so you'd be in the 100% category if you met the holding period.

I'm really sorry to hear about your situation - being just two months short of the 5-year requirement is incredibly frustrating, especially when you've been with the company since its founding. While the other commenters are correct about the general rule that C-Corp holding periods don't "tack" from previous entity types, there might be one avenue worth exploring given your specific timeline. Since your S-Corp to C-Corp conversion happened in October 2018, you should definitely investigate whether this qualified as a tax-free reorganization under Section 368 of the Internal Revenue Code. If the conversion was properly structured as a Section 368 reorganization (which many S-Corp to C-Corp conversions are), there's potentially an argument for holding period tacking under certain circumstances. This is an extremely technical area of tax law where the specific documentation and structure of your conversion matters enormously. Given the potential tax savings at stake, I'd strongly recommend consulting with a tax attorney who specializes specifically in Section 1202 and corporate reorganizations - not just a general CPA. You'll need someone who can review your conversion documents, operating agreements, and any legal opinions from 2018 to determine if there's any path forward. The fact that you were kept in the dark about sale details is also concerning from a fiduciary duty standpoint, but that's a separate issue. For now, focus on gathering all your corporate documents from the 2018 conversion and get specialized legal advice before your filing deadline.