Understanding the 1202 Exemption: A Powerful Tax Tool for Business Owners

At Golden Shield Business Brokers, we talk to business owners every day who are thinking ahead to the eventual sale of their company. One of the most powerful—and most overlooked—tax strategies we discuss with them is the Section 1202 Qualified Small Business Stock (QSBS) exemption.

If your company qualifies, Section 1202 could allow you to eliminate up to 100% of capital gains taxes on the sale of your business. That’s not a deduction. That’s a full exclusion of gains—potentially saving millions.

But here’s the catch: you must plan ahead.

What Is the 1202 Exemption?

Section 1202 of the Internal Revenue Code allows certain shareholders of qualified C corporations to exclude up to 100% of capital gains from the sale of stock, as long as the stock meets specific requirements.

For stock acquired after September 27, 2010, the entire gain can be tax-free, up to the greater of:

• $10 million or

• 10 times your original investment

This can be a game-changer for entrepreneurs planning a future sale.

Who Qualifies?

To benefit from the 1202 exemption, both you and your company must meet a set of criteria:

✅ The Company Must Be a Qualified Small Business:

• Structured as a C corporation (S corps and LLCs don’t qualify)

• Gross assets under $50 million at the time the stock is issued

• Operates in a qualified trade or business (most product-based and tech companies qualify; service businesses, including health, law, finance, and hospitality, do not)

✅ The Stock Must Meet These Requirements:

• Acquired directly from the company (not through a secondary sale)

• Held for at least five years

• Acquired in exchange for cash, property (not stock), or services

✅ The Shareholder Must Be:

• An individual, trust, or pass-through entity

• Not a corporation

• Able to trace and document the original purchase

Why Planning Early Matters

Many business owners unknowingly disqualify themselves from this powerful exemption—by waiting too long to structure correctly. The five-year holding period must be met, and the stock must be issued under the right conditions.

That’s where we come in.

How Golden Shield Helps

At Golden Shield Business Brokers, we don't just help you sell your business—we help you maximize what you walk away with. As part of our exit planning strategy, we work with your legal and tax advisors to:

• Evaluate if a C corporation conversion makes sense

• Explore how 1202 fits into your 5-year business sale roadmap

• Structure future growth and stock issuance to preserve QSBS eligibility

• Coordinate with your CPA or tax attorney to ensure compliance and documentation

Don’t Leave Money on the Table

Selling your business is likely the biggest financial event of your life. With proper planning, Section 1202 can give you a once-in-a-lifetime opportunity to avoid capital gains taxes entirely.

But you need to act early—not when you’re already talking to buyers.

📞 Let’s talk about how we can help you plan your exit and maximize your after-tax outcome. Reach out today and start building the value of your business with the end in mind.