2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

When a shareholder sells QSB stock, the total

gain that may be excluded under Section 1202 for each issuing corporation is limited to the greater of:

1. $10 million, reduced by the aggregate amount of eligible gain taken into account under this provision for prior tax years (the "cumulative limitation"), or 2. 10 times the aggregate adjusted basis of QSB stock sold during the tax year (the annual limitation). Section 1202 applies only upon the "sale or exchange" of QSB stock. Thus, if a C corporation sells its assets, Section 1202 will not be available to exclude corporate-level gain resulting from the sale. However, if the corporation subsequently liquidates by distributing the sales proceeds to its shareholders, the shareholders will be able to use Section 1202 to exclude any gain upon liquidation. IMPACT OF THE NEW TAX LAW With the TCJA reducing the corporate tax rate to 21% and Section 1202 offering a 100% exclusion upon the sale of QSB stock, taxpayers must continue to approach the proper entity choice for their business on a case-by-case basis. After all, the owner of a pass-through entity continues to be subject to only a single level of tax. The taxpayer-friendly provisions of the TCJA may narrow the advantages of pass- through status. Section 199A also allows the pass-through business owners to claim a 20% deduction of business income, which reduces the top rate on such income to 29.6%. The imposition of double taxation on C corporation income amounts to an effective tax rate as high as 39.8%. As a result, doing business as a pass-through continues to offer a sizable current tax advantage relative to a C corporation.

Many factors must be taken into consideration in

choosing an entity, but opting for C corporation and potential Section 1202 benefits will make sense when:

1. A 5-year holding period is realistic, and shareholders will be able to take advantage of Section 1202.

2. The expected appreciation in the value of the corporate stock is enough to overcome the effect of double taxation on operating income, if income is distributed.

3. Shareholders are willing to retain earnings in the corporation to minimize the effect of double taxation. This is especially true for businesses that need to retain earnings for future growth. 4. Based on the nature of the business, the active business requirement and gross-asset tests will not be problematic.

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