A taxpayer may be allowed to exclude from taxable income a portion of the gain realized on the sale of qualified small business stock. There are two sections of the Internal Revenue Code that provide such an opportunity. Section 1202 permits a taxpayer to exclude a specified percentage of such gain, while §1045 permits a taxpayer to avoid, or at least defer, recognition of potentially all such gain if the taxpayer reinvests in qualified small business stock within sixty days.
Section 1202 permits a taxpayer, other than a corporation, to exclude in general 50% of the gain realized on the sale of such stock if the taxpayer holds the stock for more than five years prior to sale. The amount of gain which may be excluded in this manner is limited, on a “per issuer” basis, to the greater of $10 million or ten times the taxpayer’s basis in the stock. A portion of the gain excluded under §1202 must be added back, however, as a preference for alternative minimum tax purposes.