The Top Benefits of Investing in 1202 Small Business Stock for Entrepreneurs
As an entrepreneur, your success in business relies heavily on your ability to generate profits and secure capital. One way to boost your chances of success is by investing in small business stock, more specifically, 1202 small business stock.
In this article, we’ll examine what 1202 small business stock is and the top benefits of investing in it.
What is 1202 Small Business Stock?
According to the Internal Revenue Service (IRS), Section 1202 of the tax code allows individuals to exclude from federal tax up to 100% of the gain realized on the sale of qualified small business stock (QSBS).
To qualify as QSBS, the stock must meet certain criteria, including but not limited to being issued by a domestic C corporation, having aggregate gross assets of no more than $50 million (at the time of stock issuance), and being held for at least five years.
Now that we understand what 1202 small business stock is let’s take a closer look at its benefits.
Top Benefits of Investing in 1202 Small Business Stock
1. Tax Exemption
As mentioned earlier, one of the most significant benefits of investing in 1202 small business stock is that it offers tax exemption. Specifically, those who invest in QSBS and hold it for at least five years may be able to exclude up to 100% of the gains realized from the sale of the stock from federal income tax.
For instance, suppose you invested $100,000 in a QSBS and sold it for $1 million after holding it for at least five years. In that case, you could potentially exclude up to $900,000 of gain from federal income tax, resulting in a significant tax savings.
2. Increased Return on Investment (ROI)
Investing in 1202 small business stock can also yield a substantial return on investment (ROI) due to its associated tax benefits. Since the tax exemption reduces the amount of tax paid on the investment, it increases the effective ROI.
For example, suppose you invest $100,000 in a QSBS and realize a 25% ROI after holding it for at least five years. In that case, due to the tax exemption, the effective ROI would be even higher, increasing your overall return.
3. Diversification
Investing in 1202 small business stock provides an opportunity for diversification since QSBS investments can spread across several corporations.
By spreading your investment in QSBS across several diverse firms, it helps to minimize risks and increases the chances of overall success, similar to how mutual funds work.
Real-Life Examples
To better understand the benefits of 1202 small business stock investment, let’s look at some real-life examples:
In 2010, Facebook issued its initial public offering (IPO), and many investors, including those who held QSBS, benefited significantly from the tax exemption offered.
Similarly, in the early 2000s, Romotive, a robotics startup that developed smartphone-controlled robots, raised $1.5 million from multiple investors, and most of them received a substantial tax exemption when the company was sold to a larger corporation.
Conclusion
Investing in 1202 small business stock can offer significant benefits to entrepreneurs and investors. Notably, it provides tax exemption, increased ROI, and diversification opportunities.
However, it is crucial to understand the associated risks, such as the illiquidity of such an investment since the QSBS investment must be held for a minimum of five years to qualify for tax exemption.
In conclusion, before investing in 1202 small business stock, it is highly advisable to seek professional advice and conduct extensive research to make an informed investment decision.
