Most entrepreneurs and early investors are familiar with the five-year holding period for §1202. This tax code section allows an exclusion on the gain of qualified small business stock (“QSBS”) of up to $10 million or 10 times the adjusted tax basis of the stock. If your exit occurs before the five-year holding period, you typically won’t qualify for §1202, but §1045 might be your saving grace.
§1045 allows a deferral on the gain (not an exclusion) of qualified small business stock, often referred to as a rollover. The holding period for this tax code section is only six months and the rollover must occur within 60 days beginning on the date of sale of the QSBS. The amount of gain deferred typically depends on the amount of proceeds rolled over into the new QSBS.
What’s the benefit here? §1045 allows the Taxpayer to ‘tack-on’ the holding period of the original QSBS acquired to the new QSBS which proceeds were rolled into. Not only may the gain on the sale of the original stock be deferred for income tax purposes (in part or full), but the new stock assumes the holding period of the original QSBS bringing the Taxpayer closer to meeting the §1202 five-year holding period.
Lou Sierra, CPA, MST, is a Senior Tax Accountant at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.