Could You Qualify for a 100% Tax Exclusion When Selling Your Business? Understanding Section 1202

Selling a business is a major milestone—and for some entrepreneurs, it can also come with a unique tax-saving opportunity. If you’re planning to sell all or part of a company structured as a C corporation, Section 1202 of the Internal Revenue Code may allow you to exclude up to 100% of the capital gains from federal taxes. That could mean keeping millions more of what you’ve built.

The catch? Like most things in the tax code, the rules are complex. And timing is everything.

At Plancorp, we help business owners navigate the many moving parts of a business sale, from tax and estate planning to managing the personal wealth that follows. Here’s what you need to know about Section 1202—and why it’s worth exploring if a sale is on your horizon.

What Is Section 1202?

Section 1202, often referred to as the Qualified Small Business Stock (QSBS) exclusion, allows individuals to exclude up to $10 million—or 10 times their original investment basis, whichever is greater—from federal capital gains tax when selling certain stock.

The provision was designed to encourage investment in small businesses, and if you meet the criteria, it could significantly reduce your tax burden upon exit.

Depending on when the stock was acquired, you may be able to exclude:

• 50% of gains (for stock acquired between August 10, 1993 and Feb. 18, 2009)
• 75% of gains (Feb. 18, 2009 – Sept. 27, 2010)
• 100% of gains (after Sept. 27, 2010)

The 100% exclusion is the most powerful—and the most common for current business owners planning a sale today.

Who Qualifies for Section 1202?

There are three key layers to qualification: the type of stock, the nature of the business, and shareholder eligibility.

1. Stock Requirements

• Must be originally issued by a domestic C corporation
• You acquired it directly—through purchase, exercise of options, or as compensation
• Held for at least five years before the sale

2. Business Requirements

• At the time the stock was issued, the company’s gross assets must not exceed $50 million
• At least 80% of the company’s assets must be used in an active trade or business (not investment companies, real estate firms, or professional services like accounting or law)

3. Seller Requirements

• You must be an individual (or certain trusts or pass-through entities)
• You cannot be a corporation selling QSBS and claiming the exclusion

Even if you’ve never heard of QSBS before, your stock may already qualify—or could be structured to do so with proactive planning.

What Could That Mean for Your Business Sale?

Let’s say you invested $1 million into your business in exchange for stock, and years later, sell your company for $11 million. If the stock qualifies under Section 1202, you could potentially exclude the full $10 million gain from federal capital gains tax.

That could result in millions of dollars in tax savings, depending on your tax bracket and state of residence.

Timing and Planning Are Critical

Section 1202 isn’t something you can take advantage of retroactively. It requires forethought, documentation, and in many cases, coordination with your legal and financial teams.

Some common planning considerations include:

• Holding period: You must hold QSBS for five years. If a sale is approaching before then, strategies such as tax-deferred rollovers under Section 1045 may be considered.
• Gifting QSBS to family or trusts: This can spread the amount of the exclusion across multiple taxpayers—but must be done properly to maintain eligibility.
• Entity conversion: If your business isn’t currently a C corp, you may consider converting—but the five-year clock starts at the point of QSBS issuance, not conversion.

If you're exploring the sale of a business, now is the time to evaluate whether QSBS applies—and how to integrate it into your broader business succession plan.

Common Pitfalls to Avoid

Even savvy business owners can get tripped up by these issues:

• Stock acquired from someone else (QSBS treatment often doesn’t carry over in sales)
• Converting to a C corp too close to a planned sale
• Failing to meet the active business requirement during the five-year holding period
• Poor documentation of original issuance or company valuation

The takeaway? Work with advisors who understand the nuances and can help you avoid disqualifying mistakes.

Why Plancorp?

At Plancorp, we understand that selling a business isn’t just a transaction—it’s a transition. One that impacts your personal finances, estate plans, legacy goals, and next chapter.

Our team provides integrated support across both business succession planning and personal wealth management, helping you:

• Evaluate your eligibility for Section 1202 and other tax strategies
• Coordinate with attorneys and CPAs on deal structure
• Manage liquidity after a sale to support your long-term goals
• Align your estate and gifting strategy with your new wealth picture

We help you see the full picture—and make smart, forward-looking decisions every step of the way.

Final Thoughts

Section 1202 offers an incredible tax benefit for those who qualify—but it requires proactive planning and careful coordination. If you’re thinking about selling a business in the next few years, now is the time to explore whether you’re eligible and how to incorporate it into your broader financial strategy.

Let’s talk about how to keep more of what you’ve built—and set yourself up for what’s next.