Integrating Section 1202 Eligibility Into Your M&A Planning

Key Takeaways:

• Taxpayers and advisors must integrate QSBS eligibility into M&A planning well before a liquidity event, as capitalization structures and transaction timing often determine the outcome long before a sale occurs.

• Complex cap tables, including convertible notes, stock options, and simple agreements for future equity, affect Section 1202 treatment and require coordinated analysis.

• Time under a convertible instrument or equity compensation arrangements does not carry over to the holding period of the stock.

For many founders and early investors, Qualified Small Business Stock (QSBS) doesn’t become real until a deal is on the table. Only then, often deep into negotiations over a liquidity event, do they start asking whether the anticipated gain is taxable or excludable under Section 1202.