Can anyone explain Section 1202 QSBS exclusion for business resale? Tax planning help needed

Thanks for the explanation! Quick question - what if the business is currently an S Corp but converts to a C Corp right before I purchase it? Would the stock then qualify for Section 1202? Also, how strict is the "qualified trade or business" definition? I'm looking at a manufacturing business, would that likely qualify?

If an S Corp converts to a C Corp right before you purchase it, then yes, the stock could potentially qualify for Section 1202 treatment when you later sell it. Just make sure the conversion is complete before you acquire the shares. The key is that you're acquiring original issue stock in a C Corporation. Manufacturing businesses typically qualify as they're not in the excluded service categories. Section 1202 excludes businesses in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any business where the principal asset is the reputation or skill of employees. Manufacturing falls outside these categories and is generally considered a qualified trade or business for Section 1202 purposes.

How exactly does the tool work? Does it just give general advice or can it actually analyze my specific business situation? I'm looking at a distribution company that has about $40M in assets, but some of those assets are investment securities they're holding.

Sounds interesting but I'm skeptical. Does it just regurgitate the IRS code or does it actually provide actionable advice? I've read so many confusing interpretations of Section 1202 that I need something that gives clear direction, not more theory.

The tool works by analyzing the specific details of your business situation through a guided questionnaire. It's not just general advice - it asks about your business type, asset composition, activities, and acquisition plans to provide customized guidance. For your distribution company with $40M in assets including investment securities, this is exactly the kind of situation where the tool would be valuable. Section 1202 has specific requirements about active business assets - generally at least 80% of assets must be used in the qualified active business. The tool would help calculate whether your investment securities might push you over that threshold and suggest restructuring options. It definitely provides actionable advice, not just code citations. It gave me specific structuring recommendations with explanations of why certain approaches would preserve QSBS eligibility and others wouldn't. It also flagged timing considerations I hadn't thought about, like the importance of when stock is issued relative to asset threshold measurements.

How does this service actually work? Do they just call the IRS for you or what? I've been trying to get through for weeks about a similar Section 1202 question.

This sounds like BS. I've never heard of an IRS agent giving detailed tax planning advice like that, especially about something as complex as Section 1202 qualification. They usually just direct you to publications or tell you to consult a tax professional.

They basically hold your place in line with the IRS and call you when they're about to connect you. It's not that they're calling on your behalf - they're just navigating the phone tree and waiting on hold so you don't have to. When an agent is about to pick up, they connect you directly to take the call. The IRS agent definitely didn't provide detailed tax planning advice, but they did confirm specific factual requirements about Section 1202. I asked very specific yes/no questions like "Does converting from an LLC to a C Corporation immediately before purchase disqualify the stock from Section 1202 treatment?" and "Are redemptions within 2 years after stock issuance problematic for Section 1202?" The agent was able to clarify the technical requirements, though they did also suggest consulting a tax professional for my overall strategy.

Thanks for bringing this up - I hadn't even considered redemption timing issues. Is there any exception if the redemption is very small compared to the total outstanding shares? For example, if they bought back 2% of shares from a departing employee?

There is a de minimis exception for redemptions, but it's very limited. The exception only applies if the total value of stock redeemed within the relevant period doesn't exceed $10,000 OR 2% of the value of all outstanding stock at the beginning of the period. So for most businesses of meaningful size, that 2% threshold is really tiny. The safest approach is to ensure no redemptions have occurred in the look-back period. If there have been redemptions, you'll need to carefully analyze whether they fall within the de minimis exception or whether there's a qualifying exception for death, disability, or divorce (there are specific carve-outs for these situations).

Yes, this is a real concern! One way around this is to establish a separate entity for your excess cash/investments. The "active business" test requires that at least 80% of assets be used in the active conduct of a qualified business. If your cash reserves are getting too large, you could dividend out excess cash to yourself and then invest personally, or create a separate investment entity that wouldn't affect your QSBS-eligible company.