• The new tax bill introduces a graded holding period for QSBS, with gain exclusions based on how long shares are held.

• The fixed gain exclusion under Section 1202 increases from $10 million to $15 million for qualifying shares issued after July 4, 2025.

• The asset cap for calculating the 10X adjusted basis exclusion rises from $50 million to $75 million, expanding potential gain exclusions for shareholders.

—

The One Big Beautiful Bill Act, signed into law July 4, 2025, makes three significant changes to Section 1202. These changes affect the five-year holding period required and the amounts of gain exclusion under the law.

Here are answers to frequently asked questions about these changes:

How was the holding period requirement revised?

Under prior law — and for qualified small business stock (QSBS) shares prior to the Act taxpayers must hold QSBS shares for five years from the date of issue for any gain exclusion which is 100%.

For QSBS shares issued after the date of the new law, there is a so-called “graded” holding period. Thus, if you hold shares for three years from the date of issue, the gain exclusion is 50%. If four years from the date of issue, the gain exclusion is 75%. If shares are held for five years, which is consistent with prior law, the gain exclusion is the longstanding 100%.

This change affects both the holding period and the amount of gain excluded depending on the applicable holding period achieved.

Has the gain exclusion increased under the new law?

Yes, Section 1202 gain exclusion is based upon the greater of (a) $10 million (the “fixed” amount) or (b) 10 times adjusted basis in the qualifying QSBS shares (the “10X” amount). The new law makes changes to both elements of this gain exclusion calculation.

What is the change to the $10 million exclusion?

For qualifying shares issued after the enactment date of the new law, the “fixed” gain exclusion amount is now $15 million. Further, this $15 million amount is indexed for inflation for years beginning after 2026.

What is the change to the 10X adjusted basis gain exclusion?

The 10X exclusion provision involves the fair market value of the QSBS corporation’s assets at the time it issues qualifying shares. If the assets at this date are valued at, hypothetically, $27 million, then the 10X adjusted basis element yields an aggregate gain exclusion of $270 million for all shareholders.

Existing law was based on an asset cap of $50 million. The new law increases that cap to $75 million. Thus, hypothetically, if a corporation had an asset valuation upon conversion after the passage of the new law of $69 million, the aggregate gain exclusion for shareholders would be $690 million. This example reflects an increase in total gain exclusion by $190M over the prior maximum exclusion of $500M.

Like the $15 million element of gain exclusion, this asset provision is also indexed for inflation for years after 2026.

What New Section 1202 Changes Mean for You

These increases in gain exclusion expand the number of eligible entities that may consider a 1202 conversion. The increases also offer a significant expansion of the basic gain exclusion and continued adjustment upwards due to inflation indexing.

These are positive changes for development stage enterprises, the capital allocation flowing to them, and the entrepreneurs and investors involved in such businesses.

How MGO Can Help

Understanding the new Section 1202 rules is key to accessing available tax benefits — especially as you plan for growth, fundraising, or a future exit. Our tax professionals can help you assess eligibility under the revised law, develop documentation strategies, and prepare for investor reviews, audits, or transactions. Contact us today to learn how we can support your goals.

The post New Tax Act Changes to Qualified Small Business Stock Under Section 1202 appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• High-net-worth individuals often have multiple income streams and need to coordinate tax strategies across entity types and asset classes.

• The proper structuring of investments can often have a significant positive impact on the economic gain realized.

• Start to plan at least 18 to 24 months before the sale of a closely held business to ensure proper structure, boost business valuation, and improve after-tax outcomes.

—

You’ve built significant wealth. As a result, taxes have become more than just a line item in your budget — they’re a force that can quietly erode your returns, complicate your business exit, and reshape your legacy.

Fortunately, you have a window of opportunity to take control. Proactive tax planning can help you align today’s strategies with tomorrow’s vision — whether you’re juggling multiple businesses, eyeing a potential sale of an investment, or preparing to transition out of your company.

This article examines how to approach tax planning to maximize your earnings and stay ahead as tax laws shift.

Understanding the Tax Implications of Different Income Streams

The average high-net-worth individual typically has around seven income streams. These can include salaries and wages, pensions and annuities, interest, dividends, capital gains, rental and royalties, business profits, and more.

Each type of income can face different tax rules and rates — which makes planning across all sources critical.

For example, you might defer income into years where your marginal rate is lower (such as in retirement or during a gap year after a business sale), accelerate deductions in high-income years to offset earnings, or swap investment property using a 1031 like-kind exchange to defer recognition of capital gains.

Strategically harvesting investment losses can also help manage bracket thresholds and your exposure to the net investment income tax (NIIT).

Also, consider how you generate income through various entities. Sometimes, an investment’s structure can have a greater impact on tax outcomes than the investment itself.

For example, at the federal level, income from a C corporation is taxed at both the corporate (21%) and shareholder levels (up to 23.8% on dividends), resulting in effective tax rates that leave less than half of earnings in your control once you layer in state taxes. In contrast, S corporations and other passthrough structures may offer favorable pass-through treatment and qualify for a QBI deduction (20% of the business income).

Planning for Business Exits with Taxes in Mind

Selling a closely held business may be a once-in-a-lifetime event. The company may make up a large portion of your net worth and, with so much at stake, the tax treatment of the sale can dramatically alter the outcome.

We recommend that business owners start preparing for a sale at least 18 to 24 months in advance. But even if a sale isn’t on the immediate horizon, business owners should operate as though the company is always “for sale”. Opportunities often arise unexpectedly and financials that aren’t sale-ready can delay or derail a deal. Minimize all working capital kept in the business for at least the year preceding a sale. You will not be paid any more money for a business with a ton of working capital versus the minimum.

A knowledgeable CPA can help you identify red flags, clean up reporting, and implement strategies that improve the business’s financial profile so you’re prepared to act when the timing is right.

A longer timeline gives you runway to halt unnecessary reinvestment and boost earnings before interest, taxes, depreciation, and amortization (EBITDA) — directly affecting the sale price and reducing excess working capital.

Structuring the Deal

The structure of a sale plays a crucial part in the tax treatment of potential gains. Many sales of closely held businesses take the form of asset sales rather than stock sales, mainly because asset purchases offer more favorable terms to the buyer. When a buyer purchases the company’s assets, they avoid inheriting legacy liabilities and can allocate the purchase price among depreciable assets for future tax benefits.

However, even for transactions legally structured as a stock sale, buyers may use a Section 338(h)(10) election to treat the deal as an asset sale for tax purposes. This hybrid structure provides the buyer with the benefits of an asset acquisition while technically acquiring the stock.

From the seller’s perspective, both methods can yield similar tax outcomes. The gain from the sale typically flows through to the owner as a capital gain. If any portion of the purchase price is allocated to depreciated fixed assets, there may be a small amount of ordinary income due to depreciation recapture. As long as the owner is actively involved in the business at the time of sale, it’s generally exempt from the 3.8% NIIT.

In some cases, especially in deals involving private equity, buyers want to retain the existing owner’s involvement, so the buyer may acquire a majority interest and require the seller to continue managing the business. This is often structured through an F-reorganization, which allows for tax deferral on the portion of the business not immediately sold.

Another common feature of modern deals is the earnout: a portion of the sale price that’s paid over time based on the company’s future performance — usually tied to EBITDA targets. Earnouts can create significant tax planning opportunities and risks when they extend over several years.

Finally, for owners concerned about a large tax hit, investing the gain into Qualified Opportunity Zone (QOZ) funds can provide a way to defer capital gains and potentially reduce future taxes. This benefit was made permanent by the One Big Beautiful Bill Act.

Working closely with a CPA who understands these nuances allows you to align the terms of the sale with your broader financial goals.

Potential Section 1202 Tax Saving Strategies

Selling qualified small business stock (QSBS) may qualify for Section 1202 treatment. This tax provision allows individuals to avoid paying taxes on up to 100% of the taxable gain recognized on the sale of QSBS. The gain exclusion is worth $10 million or 10 times investment basis and applies to C Corporation stock issued after August 10, 1993, and before July 4, 2025, held for at least five years.

The recently passed One Big Beautiful Bill Act increases the Section 1202 exclusion for gain to $15 million or 10 times basis for QSBS acquired after July 4, 2025, and held for at least five years. There is a reduced gain excluded if the stock issued after July 4, 2025, is only held for three years (50% exclusion) or four years (75% exclusion).

Section 1202 creates an effective tax rate savings of up to 23.8% for federal income tax, and many states follow the federal treatment — resulting in even more substantial savings.

How MGO Can Help

Tax outcomes are rarely 100% predictable, but we can help shape them with foresight and planning.

Now is the time to take a closer look at your income, investments, and business interests. Don’t wait until the tax code changes. Schedule a planning session with an MGO advisor to start building a roadmap today.

The post Proactive Tax Planning Strategies for Exiting Your Closely Held Business appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• In 2021, the IRS issued two rulings with opposite outcomes on whether businesses qualified under Section 1202.

• The IRS ruled an insurance agency did not perform brokerage services — but found a real estate platform did.

• These cases highlight the ambiguity in IRS guidance and why businesses should review their status with a tax advisor.

—

Section 1202 of the Internal Revenue Code offers one of the most powerful tax incentives available: the potential for a 100% exclusion of capital gains on the sale of qualified small business stock (QSBS).

But qualifying is not always straightforward. Two rulings released in 2021 highlight how the IRS is interpreting a key exclusion — brokerage services — with surprising differences. This matters for companies operating near the edge of excluded industries (certain business types that are specifically disqualified from receiving the tax benefit, such as health, law, finance, and brokerage services).

What the IRS Said in 2021

In April 2021, the IRS issued PLR 202114002, addressing whether a taxpayer’s insurance agency qualified under Section 1202. The company operated under two models: direct appointments with insurance carriers and wholesale intermediary agreements. In both models, the agency provided administrative services like client advising, claims reporting, and support.

Even though insurance is an excluded industry, the IRS did not disqualify the business. It concluded the agency was not engaged in brokerage services, a category that would otherwise make the stock ineligible for QSBS treatment.

Later in 2021, the IRS issued Chief Counsel Advice memorandum CCA 202204007. This internal IRS guidance focused on a tech-enabled platform that allowed non-binding reservations of rental properties. The platform processed payments and kept a property database, but did not finalize leases or represent either party. The business also held real estate broker licenses.

In this case, the IRS found the platform was engaged in brokerage services and did not qualify for Section 1202 gain exclusion. Instead of using a narrow or industry-specific definition of “brokerage,” the IRS applied reporting rules from another part of the tax code — Section 6045 — and introduced policy reasoning to support a broader exclusion.

Why This Contrast Matters

These two rulings reached opposite conclusions about what counts as brokerage. The insurance agency, which might normally be seen as excluded, was considered eligible. The tech platform, which arguably operated more like a software company, was disqualified.

The difference is more than just factual nuance. The Chief Counsel Advice introduced policy rationale, saying that “brokerage” should be interpreted broadly to limit eligibility under Section 1202. That’s a new development. None of the 12 known private letter rulings have taken that approach.

The takeaway? IRS interpretation is evolving — and not always in the taxpayer’s favor.

What This Means for Your Business

Most companies assume they qualify for Section 1202 simply because they’re structured as C corporations and meet the asset and holding period requirements. But those are just the starting point.

The most complex and overlooked test is whether your company is engaged in a qualified trade or business. That’s where the real analysis begins. The law excludes broad categories like health, finance, law, consulting, and brokerage — many of which increasingly overlap with high-growth, tech-enabled industries. Think digital health platforms, fintech services, or AI-powered advisory tools.

Whether your business qualifies doesn’t depend on how the IRS “chooses” to interpret your model — it depends on how clearly your advisors position and support your case based on the facts. In these gray areas, a well-documented narrative can make the difference between full gain exclusion and a missed opportunity.

Why the Qualified Trade or Business Test Stands Alone

Other elements of Section 1202 are factual and can be reviewed with documentation, such as whether:

• Stock was issued directly by the company

• Gross assets were under $50 million at the time

• The stock has been held for five years

But the qualified trade or business test is different. It requires understanding how the IRS views certain industries, analyzing operational facts, and building a position that can be held under review.

Checklists are not enough. This is the part of Section 1202 that requires deeper legal and tax analysis, not assumptions.

Final Thought

Your business may already be promising shareholders or investors that it qualifies under Section 1202. But as these IRS rulings show, that promise only holds if it’s backed by a solid and defensible position.

Now is the time to assess where your business falls — and whether you’re properly documenting your eligibility before it’s challenged.

How MGO Can Help

MGO works with growth-focused businesses across industries to evaluate their Section 1202 status, prepare documentation, and support capital strategies. We help find risk areas, align operational facts with IRS interpretations, and support eligibility before or during an exit.

If your business is in a gray area — or wants to get ahead of the rules — let’s talk.

The post What Two IRS Rulings Reveal About Section 1202 Eligibility appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Section 1202 offers capital gains exclusion for QSBS but requires detailed qualification and documentation. 

• Eligibility depends on both objective facts and nuanced interpretation of business activity. 

• Companies — not shareholders — should lead the Section 1202 qualification process and share results with investors. 

—

If your company has issued or plans to issue stock, Section 1202 of the Internal Revenue Code could provide your shareholders with one of the most powerful tax planning opportunities available. Known as the Qualified Small Business Stock (QSBS) exclusion, Section 1202 allows eligible shareholders to exclude up to 100% of capital gains from federal income tax on the sale of their stock — if specific criteria are met. 

Though Section 1202 has existed since 1993, it gained traction after the 2017 Tax Cuts and Jobs Act lowered corporate tax rates, making QSBS one of the few remaining high-impact planning tools for growth-stage companies — along with the research and development (R&D) tax credit and bonus depreciation. 

But this isn’t something that happens automatically. The rules are layered, the guidance is limited, and a casual approach can result in missed opportunities or unintended exposure. Section 1202 deserves focused attention and deliberate planning. 

The Value Behind Section 1202 

Section 1202 provides a unique tax benefit: qualifying shareholders may exclude from income greater than $10 million or ten times their investment basis in stock. That makes it a strategic asset for early investors, founders, and employees with equity — particularly in industries where growth and exit events are part of the long-term plan. 

Despite the high value, Section 1202 remains underutilized. Many companies assume they qualify but never take steps to confirm the details. At the same time, investors often expect — or even require — 1202 status in contracts signed by issuers. When companies fail to verify and document their status, it creates uncertainty that can complicate capital raises, shareholder communications, or M&A negotiations or investments. 

Understanding What Makes a Company Qualify 

Qualifying for Section 1202 is part science, part strategy. Several conditions can be verified through documentation. These include whether the shareholder bought the stock at original issuance, the date the stock was issued, and whether the company’s gross assets were under $50 million at the time of issuance. These are foundational tests and can typically be confirmed with cap table records and financial statements. 

However, other elements are less straightforward. The most critical part of the 1202 analysis is deciding whether your company is a “qualified trade or business.” Unlike asset thresholds or holding periods, this isn’t a checkbox — it requires legal interpretation, familiarity with evolving IRS thinking, and a clear narrative about how your business operates. If you’re in a gray area, this is where the real analysis begins. 

Section 1202 categorically excludes broad types of businesses — such as those engaged in health, law, consulting, brokerage, and finance — but it offers little clarity on how those terms are defined or where those boundaries lie. This ambiguity means that even businesses working in related or emerging industries may not know where they stand. 

Don’t Put the Burden on Your Shareholders 

Section 1202 status is not something individual shareholders can — or should — figure out on their own. They don’t have access to your financials, legal history, stock issuance records, or the operational detail needed to determine eligibility. If your company issued shares in exchange for cash, property, or services, it is your responsibility as management — not theirs — to evaluate and document whether that stock qualifies for the QSBS exclusion. 

This isn’t just good tax planning; it’s a matter of fulfilling the expectations you’ve set with investors — especially if you’ve raised capital under the assumption or implication that your stock qualifies. In that sense, Section 1202 eligibility functions as a corporate tax asset. Like any high-value benefit, it needs to be understood, tracked, and preserved — particularly when planning for new investment rounds, reorganizations, or exit transactions. 

Leaving this analysis to shareholders — or suggesting they should determine it independently — is not realistic and not defensible. If your investor base includes individuals, family offices, funds, or even crowdfunding participants, it’s management’s duty to confirm and communicate 1202 status clearly. Without that, shareholders may hesitate to claim the benefit, or worse, face scrutiny if challenged during an audit or liquidity event. 

How to Move Forward with Confidence 

The good news is that most Section 1202 eligibility criteria can be evaluated and documented with the right support. If you’re unsure where you stand, now is the time to assess. Focus on reviewing your entity structure, stock issuance records, and the nature of your business operations. 

Where interpretation is needed — especially around excluded industries — consider how your business delivers value. Are you acting as a passive intermediary, or do you provide infrastructure, administrative support, or proprietary systems? These distinctions matter and could influence how the IRS or buyers assess your eligibility under Section 1202. 

Just as important: understanding your eligibility allows you to quantify the potential benefit. The $10 million exclusion is just a starting point. For many companies, the actual available gain exclusion could be far higher — $20 million, $37 million, or more. That kind of tax asset deserves to be identified, protected, and planned around. 

The most important and least defined requirement is whether your company is considered a qualified small business engaged in a qualified trade or business. That determination cannot be made through checklists alone — it demands thoughtful analysis and documentation. 

Reference Recent IRS Rulings 

If your business falls into a gray area, you may want to review recent IRS rulings that have addressed similar situations. These rulings don’t apply beyond the taxpayers involved, but they reveal how the IRS thinks about “qualified” versus “excluded” businesses. 

The IRS has offered little formal guidance on what qualifies as a trade or business under Section 1202. Recent rulings suggest the agency may rely on dictionary definitions or broader policy goals when making eligibility determinations — adding another layer of risk for companies in ambiguous categories. 

For a breakdown of how the IRS has handled these decisions in real-world cases, read our companion article: What Two IRS Rulings Reveal About Section 1202 Eligibility. 

How MGO Can Help 

MGO is a top 100 CPA and advisory firm that works with dynamic, growth-focused businesses across technology, life sciences, manufacturing, cannabis, and other sectors. Our tax professionals help companies evaluate Section 1202 eligibility, build documentation strategies, and prepare for audits, investor scrutiny, or exit transactions. With a balance of technical tax insight and strategic industry knowledge, we support clients from startup through scale — and beyond. 

Contact us today to assess whether your company uniquely qualifies — and how you can support your Section 1202 position with the right documentation and planning. 

The post How Your Company Can Unlock Section 1202 Tax Savings  appeared first on MGO CPA | Tax, Audit, and Consulting Services.