mastering 1099-b reporting on schedule d and form 8949...
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Mastering 1099-B Reporting on Schedule D and Form 8949:
Meeting Capital Gains Basis Reporting Challenges
TUESDAY, AUGUST 1, 2017, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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FOR LIVE PROGRAM ONLY
Aug. 1, 2017
Mastering 1099-B Reporting on Schedule D and Form 8949
Jolaine L. Hill, CPA, Director
Katz Sapper & Miller, Indianapolis
Notice
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should not be acted upon without the advice of a professional.
© 2017 KSM Business Services, Inc.
Mastering 1099-B Reporting on
Schedule D and Form 8949: Meeting
Capital Gains Basis Reporting
Challenges
Aug. 1, 2017
Jolaine L. Hill, CPA
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Agenda
▪ Basis reporting requirements on Form 8949 ▫ Background
▫ Definitions
▫ Adjustment codes
▪ Basis adjustments to information reported on Form 1099-B ▫ Reconciliation of multiple 1099-B forms
▫ High volume traders - Wash sales
- Mark-to-market election
▫ Bond amortization
▫ Sales of publicly traded partnerships
▪ Basis reporting for real estate transactions
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▪ Basis in assets received
▫ By gift
▫ By inheritance
▫ By distribution from an entity
▪ Section 1202 small business stock
Agenda
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▪ Prior to 2011, brokers were not required to report adjusted basis in securities sold
▪ The Emergency Economic Stabilization Act of 2008 added Code Section 6045(g), which requires brokers to report the adjusted basis in securities sold
▫ Effective dates
- January 1, 2011 for corporate stock
- January 1, 2012 for stock where the average basis method is permitted
- January 1, 2013 (or later as determined by the Secretary) for other types of specified securities
Background
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▪ Code Section 6045(h) was also added by this Act and
requires reporting for certain option transactions
▫ Effective January 1, 2013
Background
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▪ Specified security
▫ A share of stock in a corporation
▫ A note, bond, debenture or other evidence of indebtedness
▫ A commodity, or contract or derivative regarding the
commodity, if the Secretary deems basis reporting
appropriate
▫ Any other financial instrument, if the Secretary deems basis
reporting appropriate
Definitions Related to Basis Reporting
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▪ Covered and noncovered transactions
▫ A covered security is a specified security acquired on or after
the effective date that was:
- Acquired through a transaction in the brokerage account in
which the security is held or
- Transferred to such an account from an account in which the
security was a covered security, but only if the broker received a
basis statement from the other broker
▫ Securities received by gift or inheritance are not covered
securities
Definitions Related to Basis Reporting
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▫ A noncovered security is any security that does not meet the
definition of a covered security
- Examples
- Securities transferred between brokerage accounts
- Securities received by gift or inheritance
- Publicly traded partnerships
▪ Adjusted basis
▫ Broker is to use first-in, first-out unless the customer notifies
the broker by making an adequate specific identification of
the stock sold or transferred
Definitions Related to Basis Reporting
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▫ For stocks where the average basis method is allowed (e.g.
mutual funds), adjusted basis is determined according to the
broker’s default method unless the customer notifies the
broker of another acceptable method
▫ Adjusted basis is determined without regard to the wash sale
rules under Code Section 1091
Definitions Related to Basis Reporting
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Form 8949
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▪ Columns F and G are used to report adjustments to the
gain or loss reported on Form 8949
▫ Column F is for the adjustment code
- The list of codes are in the instructions to Form 8949
- Multiple codes can be entered for a single transaction
- Codes are listed in alphabetical order if multiple codes are
used
▫ Column G is the amount of the adjustment to the gain or loss
- If multiple codes apply, the adjustment is entered as a net
adjustment
Form 8949 Adjustments
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▪ Code B
▫ You receive a Form 1099-B and the basis shown in Box 1E
is incorrect
▫ If Box B of Part I or Box E of Part II is checked on Form
1099-B, enter the correct basis in Column E of Form 8949
and 0 as the adjustment in Column G
▫ If Box A of Part I or Box D of Part II is checked on Form
1099-B, enter the basis reported on the 1099-B in Column E
of Form 8949 and the amount of the gain or loss adjustment
in Column G
Form 8949 Adjustments
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▫ Example
- A stock is sold for $1,000. You purchased the stock for $500, but the 1099-B shows a cost basis of $400. You held the stock for five months. The transaction would be reported on Part I of Form 8949 with Box A checked. The cost basis reported in Column E would be $400. Code B would be shown in Column F and an adjustment of ($100) would be reported in Column G.
▪ Code T
▫ You received a Form 1099-B and the type of gain or loss shown in Box 2 is incorrect
▫ Report the transaction in the correct part of Form 8949 and enter 0 for the adjustment in Column G
Form 8949 Adjustments
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▪ Code N
▫ You receive a Form 1099-B or 1099-S as a nominee for the
actual owner
▫ Report the transaction as if you were the actual owner.
Column G of Form 8949 would then show a negative
adjustment if there is a net gain or a positive adjustment if
there is a net loss. Column H would then be 0.
▪ Code H
▫ You sold your principal residence, must report the gain on
Form 8949 and some or all of the gain can be excluded
Form 8949 Adjustments
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▫ Report the transaction as if the gain is not excluded. The
Column G adjustment on Form 8949 would be the excluded
amount of the gain, shown as a negative number.
▫ Example
- Form 1099-S reported $600,000 of gross proceeds and the
taxpayer’s cost basis is $400,000. Column G would report
($200,000) as the adjustment for the excluded gain.
▪ Code D
▫ You received a Form 1099-B showing accrued market
discount in Box 1F
Form 8949 Adjustments
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▫ There is a worksheet in the instructions to Form 8949 for calculating the accrued market discount adjustment
▫ If a partial payment is received on the bond, the adjustment is the lesser of:
- The accrued market discount reported or
- The proceeds. This amount is also picked up as interest income on Schedule B.
▫ If you chose to include the market discount in income currently, the Column G adjustment on Form 8949 will be 0. The basis in the bond should be increased by the accrued market discount that has been picked up in income for all years.
Form 8949 Adjustments
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▪ Code Q
▫ You sold qualified small business stock (Section 1202) and
can exclude part of the gain
▫ Enter the transaction as if the gain is not excluded. Enter the
amount of the exclusion as a negative number in Column G.
▪ Code X
▫ You can exclude all or part of your gain under the rules for
DC Zone assets or qualified community assets
▫ Enter the transaction as if the gain is not excluded. Enter the
amount of the exclusion as a negative number in Column G.
Form 8949 Adjustments
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▪ Code R
▫ You are electing to postpone all or part of your gain for any rollover of gain, for example, rollover of gain from QSB stock
▫ Report the gain as in the election is not going to be made. Enter the amount of the postponed gain as a negative amount in Column G.
▪ Code W
▫ You have a nondeductible loss from a wash sale
▫ Enter the sale on Form 8949 and show the amount of the disallowed loss as a positive amount in Column G. If Form 1099-B reports an incorrect amount for the wash sale, enter the correct adjustment in Column G.
Form 8949 Adjustments
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▪ Code L
▫ You have a nondeductible loss other than a loss from a wash
sale
▫ Report the sale on Form 8949 and enter the amount of the
nondeductible loss as a positive amount in Column G.
▫ Example
- You receive a Form 1099-S with gross proceeds of $600,000
and the taxpayer’s basis in the property is $700,000. The
property is the taxpayer’s principal residence. Column G would
show an adjustment for $100,000.
Form 8949 Adjustments
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▪ Code E
▫ You received a Form 1099-B or Form 1099-S and there are
selling expenses or option premiums that are not reflected on
the form as an adjustment to either the proceeds or the basis
▫ Enter the proceeds and basis as reported on the Form 1099-
B received. In Column G of Form 8949, enter as a negative
amount any selling expenses or option premiums paid that
are not reflected and enter as a positive amount any option
premiums that you received that are not reflected.
Form 8949 Adjustments
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▪ Code S
▫ You had a sale or worthlessness of small business stock (Section 1244) and the total loss is more than the maximum amount that can be treated as an ordinary loss
▫ Enter the entire sales price in Column D of Form 8949 and the entire basis in Column E. In Column G, enter the ordinary portion of the loss reported on Form 4797 as a positive amount.
▪ Code C
▫ You sold collectibles
▫ Column G would report an adjustment of 0
Form 8949 Adjustments
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▪ Code M
▫ You report multiple transactions on a single row as set forth
in the instructions for exceptions to reporting each
transaction separately
- Exception One: The transactions are covered and there are no
adjustments to cost basis
- Exception Two: Statements are attached that provide the detail
of the transactions
▫ Enter 0 in Column G unless an adjustment is required under
another code
Form 8949 Adjustments
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▪ Code O
▫ You have an adjustment not explained under any other
codes
▫ Enter the appropriate adjustment in Column G
Form 8949 Adjustments
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▪ Practice tips
▫ Use exceptions one and two in the Form 8949 instructions for
entering multiple transactions
- Exception one allows for covered transactions with no adjustments to
be reported in total on Schedule D, line 1a for short term and line 8a
for long term
- Exception two allows for detailed statements to be attached to the
return instead of entering the line by line detail on Form 8949
- For example, a taxpayer has five brokerage accounts that have sale
transactions. Each brokerage account can be listed as a line item on
Form 8949. Transactions will still need to be reported as short term
or long term and covered and noncovered.
Reconciliation of Multiple Form 1099-Bs
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Reconciliation of Multiple Form 1099-Bs
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▪ Governed by Code Section 1091
▪ Example Transaction: Taxpayer sells property in order to trigger
a tax loss and immediately repurchases the same property to
keep the same economic exposure
▪ Occurs when you sell stock or securities at a loss and within 30
days before or after the sale you:
▪ Buy substantially identical stock or securities
▪ Acquire substantially identical stock or securities in a fully taxable
trade (e.g. an incentive pay plan)
▪ Acquire a contract or option to buy substantially identical stock or
securities
Wash Sales
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▫ Acquire substantially identical stock or securities in your
traditional or Roth individual retirement account
▫ You or a corporation you control buys substantially identical
stock or securities
▪ The disallowed loss is deferred until the new stock or
securities are sold
▪ The loss is added to the basis of the new stock or
securities
▪ The holding period for the new stock or securities includes
the holding period of the stock or securities that were sold
Wash Sales
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▪ Substantially identical
▫ Facts and circumstances are considered
- Generally, stocks of one corporation are not substantially identical to stocks of another corporation
- One exception can be in a reorganization. The stocks and securities of the predecessor and the successor corporations may be substantially identical.
- Generally, bonds or preferred stock of a corporation are not considered substantially identical to common stock of a corporation
- One exception can be where the bonds or preferred stock are convertible to common stock
Wash Sales
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- For example, preferred stock is substantially identical to
common stock if:
» It is convertible into common stock
» Has the same voting rights as common stock
» Is subject to the same dividend restrictions
» Trades at prices that do not vary significantly from the conversion
ratio, and
» Is unrestricted as to convertibility
▪ If more or less stock is bought than sold, a determination
must be made as to which shares the wash sale applies
▫ Matching of shares is done
▫ Ordering starts with the first shares purchased
Wash Sales
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- For example, if shares are bought both before and after the sale that generates the wash sale, the shares bought before the sale have the basis adjustment
▪ Loss from a wash sale of one block of stock cannot be used to offset the gain on identical blocks sold on the same day
▪ Issue for high volume traders
▫ Absent any specific exceptions, the wash sale rules apply
- Wash sale rules do not apply to:
- Dealers in stocks or securities
- Individuals who incur the loss in the course of their ordinary trade or business
Wash Sales
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▪ To be engaged as a trader in securities, the following must
be met:
▫ You must seek to profit from the daily market movements in
the prices or securities instead of profiting from dividends,
interest or capital appreciation
▫ The activity must be substantial
▫ The activity must be carried on with continuity and regularity
High Volume Traders
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▪ The following facts and circumstances should be
considered in determining if a taxpayer is a trader in
securities:
▫ Typical holding periods for securities bought and sold
▫ The frequency and dollar amount of trades during the year
▫ The extent to which the activity is pursued to produce income
for a livelihood
▫ The amount of time devoted to the activity
▫ Securities held for investment should be in a separate
brokerage account from securities held for the trading activity
High Volume Traders
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▪ The mark-to-market election is under Code Section 475(f)
▪ For a trader who has made the election, all gains and
losses from the sale of securities held in connection with
the trading activity are reported as ordinary on Form 4797,
Part II
▪ Securities held at the end of the year are “marked to
market” by treating the securities as if they were sold and
then reacquired at fair market value on the last business
day of the year. This gain or loss is also reported on Form
4797 Part II.
Mark-to-Market Election
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▪ Advantages under the mark-to-market election
▫ No limitations for losses
▫ Wash sale rules do not apply
▫ Since the losses would be ordinary, significant losses could generate a net operating loss
▪ How the election is made
▫ A statement that is
- Attached to a return filed by the original due date or
- Attached to an extension for the tax year preceding the year the election is effective.
- To be effective for 2017, the election had to have been attached to the 2016 return filed by April 18, 2017 or attached to the 2016 extension.
Mark-to-Market Election
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▫ The election statement needs to include the following:
- The election is being made under Section 475(f) of the Internal
Revenue Code
- The first tax year for which the election is effective
- The trade or business for which the election is being made
▪ Form 3115 is filed in the year the election is effective
▫ There will be a Section 481(a) adjustment
- A net positive adjustment is taken into income ratably over a
four year period beginning with the year of change
- A net negative adjustment is taken into account in the year of
change
Mark-to-Market Election
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Mark-to-Market Sample Election
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▪ Brokers are now reporting bond premium amortization for both taxable and tax-exempt bonds
▫ As a preparer, what do I do with those amounts?
▪ Taxable bonds
▫ Code Section 171 governs the treatment of bond premium amortization for taxable bonds
▫ In order to receive benefit from premium amortization on a taxable bond, an affirmative election must be made
- Once the election is made, the election applies to all taxable bonds owned at the beginning of the year the election is made and all taxable bonds acquired in subsequent years
- The election may only be revoked with the consent of the Internal Revenue Service
Bond Amortization
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▫ Treatment of bond amortization after the election has been made
- For bonds purchased before Oct.23, 1986, the bond amortization is treated as a miscellaneous itemized deduction not subject to the two percent AGI limitation
- For bonds purchased after Oct. 23, 1986 and before Jan. 1, 1988, the bond premium is treated as investment interest expense
- For bonds purchased after Dec. 31, 1987, the bond amortization is a direct offset to interest income
▫ The basis of the bonds are also adjusted for the bond amortization
- Note that brokers are making the adjustment under the assumption that the election has been made
- If the election is not made, the information provided by the brokers cannot be used
Bond Amortization
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Bond Amortization Sample Election
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▪ Tax-exempt bonds
▫ Code Section 171 does not apply to tax-exempt bonds
- Bond premium amortization on tax-exempt bonds is required
▫ Tax-exempt bond premium does not provide a tax deduction
- Bond amortization reduces tax-exempt interest income
▫ The basis of the bonds are adjusted for the bond
amortization
Bond Amortization
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▪ Issues with the sale of publicly traded partnerships (PTPs)
▫ If basis is reported by the broker on 1099-B, amount is
almost always incorrect
- The only basis information the broker has is the original
investment and the amount of distributions that have been
received in the brokerage account
- Schedule K-1 activity from the PTP has not been taken into
account in the basis reported
- In many PTPs, there is an ordinary gain portion that needs to be
reported
Sale of Publicly Traded Partnerships
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Sale of Publicly Traded Partnerships
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▪ Cost basis to be used
▫ The Schedule K-1 capital account is presented on the tax
basis
▪ Bifurcation of gain or loss on sale
▫ Due to the ordinary gain element associated with the sale of
many PTPs, any gain or loss on the sale is bifurcated
between Form 4797, Part II and Form 8949
- The ordinary gain element is reported on Form 4797, Part II
- Any remaining gain or loss on the sale is reported on Form 8949
Sale of Publicly Traded Partnerships
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▪ Example of an overall gain transaction
▫ Gross sales proceeds are $4,500
▫ Cost basis per the Schedule K-1 capital account is $1,000
▫ Ordinary gain per the Schedule K-1 supplemental
information is $500
Sale of Publicly Traded Partnerships
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Sale of Publicly Traded Partnerships
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▪ Example where there is a gain on the sale and the net
Schedule D is a loss
▫ Gross proceeds are $2,000
▫ Cost basis per the Schedule K-1 capital account is $1,000
▫ Ordinary gain per the Schedule K-1 supplemental
information is $1,200
Sale of Publicly Traded Partnerships
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Sale of Publicly Traded Partnerships
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Basis For Real Estate Transactions
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Basis For Real Estate Transactions
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▪ Cost basis
▫ Cost basis starts with the contract price per the HUD
statement or equivalent closing document
▫ Cost basis includes related settlement charges
- The settlement charges can be found on the HUD statement or
equivalent closing document
- Some settlement charges may be paid outside of the closing on
the purchase
▫ Cost of any improvements made to the property
Basis For Real Estate Transactions
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▪ Cost basis in property received by a gift is equal to the
donor’s basis on the property at the time of the gift
▫ Also includes all or part of the gift tax paid by the donor on
the gift
▪ Exception for property sold at a loss
▫ The basis of property received by a gift that is sold at a loss
is the lesser of the donor’s basis or fair market value at the
date of the gift
Basis in Property Received by Gift
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▪ Cost basis in property received by inheritance is equal to
the fair market value at the date of death
▫ Exceptions:
- The fiduciary elects to use the alternative valuation date
- Cost basis becomes fair market value at the alternate
valuation date
- The fiduciary elects the special use valuation method for farms
or closely held business real property
- The fiduciary elects the qualified conservation easement
exclusion
- Cost basis becomes carryover basis
Basis in Property Received by Inheritance
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▪ Basis information reporting by the executor to the beneficiaries and the IRS
▫ Code Section 6035(a) requires that the executor of any estate required to file an estate tax return furnish to the IRS and each person acquiring an interest in property from the estate a statement identifying the value of each interest of property as reported on the estate tax return
▫ Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent, is the IRS form use to comply with Code Section 6035(a)
▫ The original effective date was for property reported on estate tax returns filed after July 31, 2015
Basis in Property Received by Inheritance
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▪ Basis in property received from a corporation
▫ The cost basis is equal to the fair market value on the date of
the distribution
▪ Basis in property received from a partnership
▫ The cost basis is equal to adjusted basis of the property in
the hands of the partnership
Basis in Property Received from an Entity
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▪ Code Section 1202 provides noncorporate taxpayers with an exclusion of a percentage of gain from the sale or exchange of qualified small business stock held by the taxpayer for more than five years
▪ Exclusion percentages are based on the date when the stock was acquired
▫ For stock acquired on or before Feb. 17, 2009, the exclusion percentage is 50 percent
▫ For stock acquired after Feb. 17, 2009 and before Sept. 28, 2010, the exclusion percentage is 75 percent
▫ For stock acquired after Sept. 27, 2010, the exclusion percentage is 100 percent
Section 1202 Small Business Stock
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▪ Small business stock definition
▫ Qualified small business stock must meet the following
criteria:
- The issuer must be a domestic C corporation during
substantially all the taxpayer’s holding period for the stock
- The stock must be originally issued after Aug. 10, 1993
- The stock must be issued directly by the issuer or through an
underwriter to the taxpayer
- Generally, the stock must be issued in exchange for money or
other property or as compensation for services provided to the
issuer
Section 1202 Small Business Stock
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- The corporation must meet the following tests:
- The $50 million capitalization test
» Aggregate gross assets may not exceed $50 million immediately
after issuance
» Controlled group rules apply
- The active business test
» The corporation is a domestic corporation that is not a DISC or
former DISC, a corporation with a Code Section 936 election in
effect or a RIC, REIT, REMIC or cooperative
Section 1202 Small Business Stock
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» At least 80% of the corporation’s assets, by value, are used in the
active conduct of one or more qualified trades or businesses
• Qualified trade or business is any trade or business other than:
• A personal service corporation
• A bank, insurance, financing, leasing, investing or similar business
• A farming business
• A business involved in production or extraction of products that permits depletion
• A business operating a hotel, motel, restaurant, or similar business
Section 1202 Small Business Stock