Section 1202 for Pass-Through Entities: Partnership Investments in Qualifying Small Business Stock

Partnership Allocations, Holding Rules, S Corporation Conversions, Transfers to Disregarded Entities

Recording of a 110-minute CPE webinar with Q&A


Conducted on Wednesday, July 31, 2019

Recorded event now available

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Program Materials

This webinar will offer tax advisers and professionals a practical guide to the rules governing IRC Section 1202 qualified small business stock (QSBS) owned by pass-through entities. The webinar will detail the gain exclusion rules of Section 1202 and the types of business entities that qualify as QSBS companies, and discuss planning opportunities for investors to structure pass-through entities to hold QSBS stock. The panel will also offer guidance on the reporting requirements and partnership allocation rules involving QSBS stock.

Description

Section 1202 allows a taxpayer to exclude the gain from the sale of QSBS after a specified holding period. QSBS stock is any stock in a qualifying small business that was operating as a C corporation at the time of issue and throughout the holding period. While a pass-through entity is excluded from issuing QSBS shares, many investors may find advantages to holding QSBS in a private equity fund or other partnership, or an S corporation.

The rules allow gain exclusion so long as the purchaser acquired the stock at original issue. Partnerships and certain other pass-through entities may qualify for gain exclusion so long as the PTE meets the QSBS rules for acquiring the shares and continuously holds the stock for the holding period. A partner or member may only exclude gain up to the interest held in the partnership at the time of stock acquisition.

The original issue requirement provides significant restrictions on the transfer of QSBS; however, there are structuring tools, such as gratuitous transfers to grantor trusts or other disregarded entities, that provide some flexibility in achieving gain deferral. Pass-through entities may also exchange certain appreciated LLC assets for QSBS stock, provided the business operates according to 1202 requirements and meets the holding period.

Listen as our expert panel details the potential benefits and risks of a pass-through entity holding Section 1202 QSBS stock.

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Outline

  1. Tax treatment of QSBS under Section 1202
  2. Meeting the requirements for gain exclusion
  3. QSBS rollovers under Section 1045
  4. Pass-through entities acquiring QSBS at original issue
  5. Rules specific to pass-through entities holding Section 1202 stock
  6. Transfers of QSBS shares allowable to maintain Section 1202 tax deferral benefits

Benefits

The panel will discuss these and other relevant topics:

  • What types of entities qualify--and do not qualify--for preferential treatment under Section 1202?
  • What are the mechanics of the gain exclusion calculations upon the sale of Section 1202 stock?
  • What are the rules and qualifications for the rollover deferral provisions under Section 1045?
  • What are the requirements to achieve ordinary loss treatment on the disposition of QSBS under Section 1244?
  • How can a pass-through entity benefit by holding QSBS stock?

Faculty

Keith, Bryan
Bryan D. Keith

Managing Director, Washington National Tax
Grant Thornton

Mr. Keith has more than 16 years of experience advising clients on corporate income tax issues, including acquisitions,...  |  Read More

Mandarino, Joseph
Joseph C. Mandarino

Partner
Smith Gambrell & Russell

Mr. Mandarino's practice focuses on corporate, tax and finance law. He is involved with a wide variety of...  |  Read More

Rappaport, Matthew
Matthew E. Rappaport, Esq., LL.M.

Partner
Falcon Rappaport & Berkman

Mr. Rappaport counsels clients on technical and complex tax issues. He works closely with closely held business owners,...  |  Read More

Rodes, Nelson
Nelson D. Rodes

Atty
Frost Brown Todd

Mr. Rodes’ practice focuses on civil and criminal tax litigation matters, where he draws on his past experience...  |  Read More

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