INSTITUTIONAL CHECKLIST · §1202 QSBS PLANNING
A transaction-time diligence checklist for evaluating potential §1202 qualified small business stock positions in a C-corporation MSO context, including 2025 OBBBA framework.
By Alex Jones, EA, CFP®, CLU®, ChFC®, CEPA, Managing Principal, Guardian Tax Consultants®.
How to use this checklist
Section 1202 qualification is determined at the moment of a triggering transaction (typically a stock sale or qualifying redemption). This checklist surfaces the diligence questions a deal team, tax counsel, and CPA firm should answer well before transaction time to preserve the position and to give counsel a clean record to opine on. It is a diligence tool, not a tax opinion.
1. Original issuance
- ☐ Stock acquired directly from the corporation (not on a secondary market).
- ☐ Acquisition for money, property other than stock, or services.
- ☐ Issuance date and consideration documented in the corporate record.
- ☐ Stock certificate or book-entry record preserved.
- ☐ No prior secondary transfer that would break original-issuance treatment.
2. Gross assets ($75M post-OBBBA)
- ☐ Aggregate gross assets at and immediately after issuance verified against the post-OBBBA $75 million threshold.
- ☐ Asset roll-up across the controlled group performed correctly.
- ☐ Pre-issuance asset transfers reviewed for taint.
- ☐ Subsequent gross-asset growth tracked for purposes of later issuances.
- ☐ Workpapers preserved for transaction-time verification.
3. Active business test
- ☐ At least 80% of corporate assets used in the active conduct of a qualified trade or business.
- ☐ Working capital and investment-asset positions reviewed for the active-business limitations.
- ☐ Real-estate holdings reviewed for active-conduct treatment.
- ☐ Active business test re-tested across the relevant holding period.
- ☐ Annual documentation of asset-use composition.
4. Qualified trade or business under §1202(e)(3)
- ☐ Confirm the trade or business is not on the §1202(e)(3) exclusion list (health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, hospitality, farming, mining, banking).
- ☐ For potentially excluded categories, document the principal-activity analysis.
- ☐ For mixed-activity businesses, document the asset-use and revenue-mix analysis.
- ☐ Counsel sign-off on the qualified-business determination.
- ☐ Re-test on material business changes.
5. Redemption taint under §1202(c)(3)
- ☐ Identify all redemptions of corporate stock in the relevant lookback windows.
- ☐ Apply the de minimis and significant redemption rules.
- ☐ Apply related-party redemption rules with care.
- ☐ Document analysis of any potentially tainting redemptions.
- ☐ Coordinate with counsel before executing any redemption during the relevant windows.
6. Holding period (3/4/5-year tiers post-OBBBA)
- ☐ Confirm acquisition date for each holder.
- ☐ Track holding period against the post-OBBBA 3-year, 4-year, and 5-year exclusion tiers.
- ☐ Document tacking rules for gifts, transfers at death, and partnership distributions where applicable.
- ☐ Plan transaction timing around the relevant tier thresholds.
- ☐ Refresh the holding-period schedule at each transaction trigger.
7. State conformity
- ☐ Identify the state of residence of each shareholder.
- ☐ Confirm state conformity to federal §1202 (full conformity, partial conformity, or non-conformity).
- ☐ Model state-tax impact assuming non-conformity in the relevant residence states.
- ☐ Review any residency-change planning with counsel.
- ☐ Document the state-tax analysis in the transaction file.
8. Transaction structure (stock sale vs asset sale)
- ☐ Confirm the transaction is structured as a stock sale to qualifying shareholders, or analyze alternative structures (e.g., installment sale, partial sale).
- ☐ Identify buyer preference and negotiating posture.
- ☐ Document the structure rationale and any concessions made to preserve §1202 treatment.
- ☐ Coordinate §1202 positioning with any §338(h)(10), §336(e), or other elections under consideration.
- ☐ Final counsel sign-off prior to closing.
Disclosures
This checklist is published by Guardian Tax Consultants® for educational and diligence purposes. It is not a tax opinion, legal opinion, or financial-product recommendation, and it does not establish an advisor-client relationship. Specific facts, applicable state law, and the federal tax code in effect at the relevant time will govern any actual planning. CPA firms, tax counsel, and family-office advisors should review each item with qualified professionals before relying on it. Past results do not guarantee future outcomes.