While a pass-through entity itself cannot take advantage of Section 1202, the shareholders of the pass-through entity may take advantage of the exclusion upon the disposition of QSBS owned by the entity, if the pass-through entity meets certain requirements. The exclusion is only available to the gain attributable to the interest that the taxpayer owned in the passthrough entity on the date the QSBS was acquired. Therefore, if Owner A has a 25% interest in ABC partnership on Jan. 1, 2015, when ABC partnership purchases QSBS for $1MM, then Owner A would only be entitled to 25% of that $1MM, even if ABC partnership purchases more QSBS after Jan. 1, 2015. 2. Original Issuance A corporation must have issued the stock after Aug. 10, 1993, and in exchange for money, property, or services but not in exchange for stock. The prohibition against acquiring QSBS through the exchange of stock is an issue when a corporation engages in a recapitalization or reorganization. However, Section 1202 allows for the preservation of QSBS status through certain Section 368 or Section 351 transactions. Likewise, the holding period for QSBS received upon a transfer by gift, at death, or from a partnership to a partner will be tacked onto the newly acquired QSBS. A similar result occurs upon the exercise of convertible stock. 3. Active Business The active business requirement specifies that the corporation must (i) have been a C corporation during substantially all of the taxpayer’s holding period of the stock for which the taxpayer is claiming the exclusion; (ii) use at least 80% of its assets, measured by value, in the active conduct of one or more qualified trades or businesses; and (iii) be an eligible corporation. A qualified trade or business does not include: a.A business involving the performance of certain professional services; b.Any banking, insurance, financing, leasing, investing, or similar business; c.Any farming business; d.Any business involving the production or extraction of products like oil and gas; or e.Any business operating a hotel, motel, restaurant, or similar business. Continued on page 14 13 nebraska society of cpas W W W . N E S C P A . O R G
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