For high-growth startups, these tax benefits are often well worth the time and brainpower spent planning and structuring for the requirements imposed by Section 1202 of the Internal Revenue Code. However, to fully take advantage of these benefits, understanding and navigating the 5-year holding period requirement under Section 1202 is essential. In this article, we’ll explore one common scenario that illustrates a key consideration with respect to the holding period from the founder’s and advisor’s perspective.
Founders and startups need to consider Qualified Small Business Stock (QSBS), which offers extensive tax advantages, for their corporate structure. QSBS awards tax benefits to shareholders of companies that meet specific eligibility requirements, including the company being a C-corporation and having assets below $50 million. These benefits mainly include partial or complete exclusions of capital gains from federal income tax. Early planning and knowledgeable advice are crucial for optimization.