*This article was updated on July 22, 2025.
Section 1202 provides for a substantial exclusion of gain from federal income taxes when stockholders sell qualified small business stock (QSBS).[1] A number of requirements must be met before a stockholder is eligible to claim Section 1202’s gain exclusion. Those requirements have been addressed in a series of articles on Frost Brown Todd’s website. This article focuses on the planning challenges facing S corporation owners interested in pursuing the benefits of Section 1202’s gain exclusion. Additional information can be found on our QSBS & Tax Planning Services page.
The following points illustrate why S corporations and QSBS don’t play together well:
- Only C corporations can issue QSBS.[2] Stock issued by an S corporation can never qualify as QSBS, even if such S corporation subsequently converts to be…
