Wealth Management Group Newsletter – Summer 2023
Daniel Konow



When evaluating the right business entity structure, the preferential tax treatment provided under Section 1202 should be given major consideration.  Additionally, the impact of Section 1202 should be assessed when exiting a business structured as a C Corporation.

Benefits of Section 1202

Under Section 1202, noncorporate shareholders are allowed to exclude the gain on the sale of qualified small business stock (QSBS) if the shareholder and corporation meet certain requirements, including a five-year holding period. 

The amount of gain that is eligible for exclusion is the greater of $10 million or ten times the basis in the QSBS.  The percent of this gain that is excluded depends on the date the QSBS was issued:

  • For current issuances and any issuances after September 27, 2010, 100% of the gain would be eligible for exclusion;
  • For issuance after February 17, 2009 and on or before September 27, 2010, 75% of the gain would be eligible for exclusion; and
  • For issuance after August 10, 1993 and on or before February 17, 2009, 50% of the gain would be eligible for exclusion.

Additional benefit is provided to QSBS issued after September 27, 2010.  These later issuances are not subject to the Alternative Minimum Tax (AMT) and all gains in excess of the excluded amount are subject to the capital gains rate.  For issuances on or before September 27, 2010, these will be subject an AMT adjustment for 7% of the excluded amount, and the non-excluded gain would be taxed at a higher 28% tax rate.

Related Read: QSBS Offers Remarkable Tax Breaks

Requirements of Section 1202

Section 1202 places certain requirements on both the shareholder and the company that must be met initially and continued throughout the shareholder’s holding period of the stock.

A shareholder must meet each of the following requirements, individually, to qualify for the exclusion under 1202:

  • The shareholder must be a noncorporate shareholder, which includes individuals, trusts and estates;
  • The shareholder must have a holding period of at least five years before the stock is eligible to be QSBS;
  • The shareholder must receive the stock on original issuance from the corporation; and
  • The shareholder must not have any offsetting short positions with respect to the stock.

For a company to have its stock qualify as QSBS, the following requirements must be satisfied:

  • The corporation must be a domestic corporation other than a DISC, REMIC, REIT or S corporation;
  • The corporation must be a “qualified small business.” To meet this requirement, the corporation’s gross assets must be less than $50 million at all times prior to the issuance of the stock and continue to be less than $50 million immediately after the stock issuance;
  • The corporation must meet the “active business requirement” for “substantially all” of the shareholders five-year holding period. A corporation achieves this test by using 80% (by value) of its assets in the active conduct of one or more qualified business activities. A qualified business includes any business other than the following activities:
    • Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees;
    • Any banking, insurance, financing, leasing, investing or similar business;
    • Any farming business (including the business of raising or harvesting trees);
    • Any business involving the production or extraction of products of a character with respect to which a depletion deduction is allowable under Section 613 or Section 613A of the Internal Revenue Code; or
    • Any business operating a hotel, motel, restaurant or similar business.

Section 1202 does place additional constraints on the use of the corporation’s assets, including the following:

  • After the first two years the corporation is in existence, no more than 50% of the corporation’s assets may be used in research activities to meet the 80% test discussed above;
  • Throughout substantially all of the holding period of the shareholder, the corporation may not hold more than 10% of the company’s assets in portfolio stocks or securities; 
  • Throughout substantially all of the holding period of the shareholder, the corporation may not hold more than 10% of the company’s assets in real estate holdings that are not used in the conduct of the corporations qualifying trade or business; and
  • The stock must meet the original issuance requirement meaning that the stockholder acquired the stock directly from the company for money, property or services. The original issue requirement may be violated in instances when a company redeems shortly or after the issuance of stock.

Taxpayers should work with their tax advisors to weave through the requirements of Section 1202 and determine whether the corporate entity structure is the correct structure for their business.

For more information, contact Dan Cameron or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.



When it comes to financial planning, married couples enjoy certain advantages. For example, if they divorce and have not entered into a prenuptial agreement, state law provides for an equitable division of their assets. Similarly, if one spouse dies without a will, state law typically says that the surviving spouse inherits a portion of the assets.

Despite these protections, married couples should have a plan to ensure that their wishes are carried out. But planning is critical for unmarried couples, who may face devastating consequences if they split up — or if one person dies — without a plan in place. If you and your partner are unmarried, here are some issues to consider:

Tax-planning opportunities

Married couples generally file joint income tax returns, which can be an advantage or disadvantage. Single-income families and families in which one spouse earns significantly more than the other generally pay less tax by filing jointly. However, spouses with similar incomes — especially high earners — may pay higher taxes than similarly situated unmarried couples.

Unmarried couples also may have some tax-planning opportunities that are unavailable to married couples. For example, if there is a substantial disparity in partners’ incomes, having the higher earning partner pay deductible expenses (such as mortgage payments or charitable contributions) may be preferable. This is because those deductions usually are more valuable on the higher earner’s tax return. It may also be possible to reduce taxes by titling investments or other income-producing assets in the lower earner’s name. Note, however, that gifts between unmarried individuals are reportable and use up gift tax exemptions.

Breakup protection

Without the protection of divorce laws, you should consider signing a cohabitation or domestic partnership agreement to provide for the division of assets in the event you split up. This is especially important if assets are titled in the name of one partner or the other for tax-planning purposes.

Joint ownership may also be an option for certain assets, such as real estate and bank or brokerage accounts. However, keep in mind that this type of ownership may raise gift or income tax issues. In such circumstances, talk to your tax advisor.

Retirement planning

When planning for retirement, keep in mind that unmarried couples often are at a disadvantage when it comes to government and employee benefits. Spouses who have been married for at least ten years, for example, can collect Social Security benefits based on their spouse’s (or ex-spouse’s) work history. This can be a big advantage for spouses who leave the workforce for a time to raise children. Additionally, if one spouse dies, the surviving spouse and other family members may be entitled to Social Security survivor benefits.

Unmarried partners are not entitled to these benefits. However, some employers provide pension plan survivor’s benefits to unmarried partners of deceased employees. Therefore, it is important to do your research and learn which retirement benefits will and will not be available. You may need to provide other savings or life insurance to make up for any shortfalls.

Related Read: Spouses Benefit From Social Security Too

Estate planning

When married couples neglect to prepare an estate plan, state law provides one for them. Unmarried couples have no such backup plan. So unless each of you carefully spell out how you wish to distribute assets, the surviving partner could be left with none of the assets in the other’s name. Take advantage of tools such as wills and trusts, strategic titling of property (for example, joint ownership), and proper beneficiary designations in retirement accounts and life insurance policies.

You also need to prepare advance health care directives and financial powers of attorney if you want your partner to have the authority to make health care decisions or manage your finances if you become incapacitated. Legally, unmarried partners are considered unrelated, so absent these documents they have little or no right to participate in health care and end-of-life decisions.

Related Read: A Trust Can Be A Mighty Financial Fortress

Put it in writing

Unmarried couples can achieve many of the same financial and estate planning objectives as married couples. But ensuring that your wishes are carried out requires careful planning — with the assistance of financial and legal professionals — and thorough documentation. If you do not have a plan in place, contact your advisor.

For more information, contact Daniel Konow at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Forward Thinking