Chicago, USA

1202 Exclusion – Cash-Flow Benefits for All

By Jodi T. Mersinger, Cendrowski Corporate Advisors LLC

Section 1202 of the US Internal Revenue Code can provide valuable tax savings to US citizens, and US resident aliens, who are investors in certain US corporations. Such a corporation is referred to as a Qualified Small Business (“QSB”), which must meet certain requirements and conduct a qualified trade or business (excludes professional services, real estate, and hospitality).

An individual investor/owner who acquired the stock of the corporation at original issue and has held the stock for at least five years, can exclude a significant amount of capital gain from US taxation on the disposition of the stock, up to the greater of: USD 10 MM or 10 times basis. Due to the substantial tax savings, private equity firms and family businesses have been compelled to structure deals to take advantage of the US section 1202 tax exclusion. There is often a short window of opportunity for these investments, as the company’s assets cannot exceed USD 50 MM upon issuance of the stock, but can grow exponentially without affecting the stock issuances prior to reaching the USD 50 MM threshold.

This favourable provision has become a useful tool in estate planning as the qualification of the original issuance and holding period of the investor of the stock passes via gifting or inheritance of the stock. Although only US corporations can qualify as a QSB, there is no requirement for the US corporation to maintain its business activities solely in the US. Thus, this powerful provision can provide benefits for non US business activities seeking funding from US PE firms or family businesses, or for US corporations expanding business abroad. There are also advantageous tax rules for those investors who sell before the five-year holding period and timely reinvest such proceeds into another QSB. Attractive tax savings for savvy investors subject to US taxation can also benefit activities across borders seeking funding from the US.

Jodi T. Mersinger

Jodi T. Mersinger

GGI member firm
Cendrowski Corporate Advisors LLC
Advisory, Corporate Finance, Fiduciary and Estate Planning, Tax
Bloomfield Hills (MI), USA
T: +1 248 540 5760
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Since 1983, Cendrowski Corporate Advisors (CCA) has provided expert client service from their offices in Bloomfield Hills (MI) and Chicago (IL). With expertise in tax planning/consulting, family offices, dispute advisory, business valuation, forensic accounting, and risk management, CCA is a CPA firm with a different perspective™.

Jodi T. Mersinger is a Tax Director in the Chicago office of Cendrowski Corporate Advisors. Jodi is an accomplished tax consultant who works with private businesses, their owners, and other executives to develop and implement tax savings and business strategies.

Published: Trust & Estate Planning Newsletter, No. 09, Spring 2022 l Photo: Iuliia Sokolovska -

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