On the last day of September, Treasury issued its 2025-2026 Priority Guidance Plan. The first topic contains 40 items addressing issues relating to OBBBA. Item 26 is entitled “Guidance under §1202 regarding the exclusion of gain from the sale or exchange of qualified small business stock.” What might this include? For years, numerous issues have raised their head in the §1202 arena without any guidance from Treasury or the IRS, including the following, which is not an all-inclusive list:
- Does gain recognized by the holder of a profits interest in a partnership holding §1202 stock at the time of issuance of the profits interest qualify for the §1202 exclusion?
- Do spouses that each own §1202-eligible stock and file a joint income tax return qualify for one or two minimum §1202 exclusions of $10 million ($15 million in the case of stock issued after July 4, 2025)?
- Does the $50 million gross asset test ($75 million in the case of stock issued after July 4, 2025, and indexed for inflation beginning in tax years after 2026) apply when otherwise qualifying §1202 stock is received in a Type E or Type F corporate reorganization?
- In the case of a partnership holding §1202 stock, does the donee of an interest in a partnership that owned §1202 stock acquired by the partnership prior to the gift being made qualify for exclusion under §1202?
- When is taxable gain recognized on the installment sale of stock that partially qualifies for a §1202 exclusion, i.e., after all the qualifying §1202 gain is recognized or on a pro rata basis?
- When a taxpayer sells §1202 stock containing “§1202 basis” that does not qualify for §1202 exclusion (e.g., unrealized gain on the incorporation of a §1202-qualifying business), can the non-qualifying gain be rolled over in a §1045 transaction?
Will Treasury or the IRS tackle any of the above issues, or will the guidance be limited to addressing some of the issues raised by the OBBBA changes, such as how the $10 million/$15 million exclusion applies when a taxpayer owns both a block of stock issued on or before the effective date of OBBBA (July 4, 2025) and another block of stock issued after the effective date of OBBBA and there is a disposition of shares? We’ll see, but when Treasury and/or the IRS get around to §1202 issues is uncertain, especially with the cutback of personnel at Treasury and the IRS.
Some of the above issues will be addressed at this year’s fall and winter virtual and in-person Tax Planning Forum® and Fundamentals of Flow-Through® programs, which are not to be missed. And for those of you interested in our in-person Las Vegas programs, make sure you register soon as our room block is closing.