One of the changes made by OBBBA was to increase the aggregate gross asset limitation from $50 million to $75 million. The manner in which this limitation applied prior to this OBBBA change was that if at any time the corporation’s aggregate gross assets (as defined in §1202(d)(2)) exceeded $50 million, the corporation could not later issue qualifying §1202 stock, even if the corporation’s aggregate gross assets dropped below the $50 million limitation prior to the issuance of stock.

There is a very interesting impact of this change in the gross asset limitation. One might be aware that OBBBA (1) increased the minimum §1202 exclusion from $10 million to $15 million and (2) provided for a 50% gain exclusion for stock held at least three years and less than four years and a 75% gain exclusion for stock held at least four years and less than five years for stock issued after July 4, 2025. Note that prior to the OBBBA change, if a corporation went over the $50 million dollar aggregate gross asset threshold at any time prior to and/or through the date of issuance of its stock, the stock would not qualify as §1202 stock. However, the OBBBA increase in the aggregate gross asset limitation to $75 million applies to the corporation’s stock issued on or after July 5, 2025, irrespective of whether the $50 million threshold had been exceeded prior to OBBBA. This means that even though the corporation may have flunked the $50 million aggregate gross asset limitation prior to July 5, 2025, the corporation should be able to issue qualifying §1202 stock after that date (assuming all the other requirements of §1202 are satisfied), if the corporation’s aggregate gross assets are no more than $75 million after a new issuance of stock. Note, however, the OBBBA change to the aggregate gross asset limitation will not cause any stock issued by the corporation prior to July 5, 2025, but after flunking the $50 million limitation, to qualify as §1202 stock.

The OBBBA changes to §1202 will be among a plethora of topics discussed at this year’s Tax Planning Forum® and Fundamentals of Flow-Through® programs, both of which are in full swing. Register now for your choice of virtual and in-person programs.