Estate Planning for Founders and Investors in Venture-backed Companies: Transfers of Qualified Small Business Stock by Gift

Congress first enacted IRC section 1202 in 1993 to encourage investment in specific types of small businesses by providing an exclusion of certain gain from the sale or exchange of qualified small business stock (QSBS). The original benefits of IRC section 1202 attracted moderate attention, but those benefits were significantly enhanced in subsequent decades, most notably under the Small Business and Jobs Act of 2010.  Today the primary benefit for holders of QSBS is a potential exclusion of 100% of eligible gain on a sale or exchange of QSBS issued after Sep. 27, 2010 (the effective date of the act) and held by a taxpayer for at least five years. This tax benefit is a major advantage for founders and investors in high-growth technology or technology-enabled start-ups that are often backed by venture capital funds, among others.

To continue reading Michael S. Arlein and Brian M. Sweet's article in Tax Stringer, please click here.