The exclusion for gain from the sale of qualified §1202 stock now is at 100% for stock acquired after September 27, 2010 so long as the taxpayer holds it for five years. But a number of businesses are excluded from issuing such favored stock. In PLR 201717010 the IRS looks at whether a taxpayer’s business would cause it to fail the test.

The potential benefit of §1202 is one of the reasons a small business might still consider forming as a C corporation (S corporation stock does not qualify for §1202 treatment) if it can otherwise meet the requirements, which will include a limit on gross assets, an “active business” test and the business cannot be on the list of “prohibited” businesses found at IRC §1202(e)(3).