Section 1202 of the Internal Revenue Code (Section 1202) provides substantial benefits to non-corporate shareholders of certain C corporations. Whether a client is looking to form a business, or a client is seeking to invest in an already formed and established business, the client should be aware of the benefits and risks associated with forming or acquiring different types of entities.

Clients should understand that every entity, whether it be a C corporation, S corporation, limited liability company, partnership, etc., has certain benefits and risks associated with them. Some benefits and risks are obvious, such as centralized management, limited liability and basic tax consequences—however, certain tax benefits are not as well known or understood.

One of the lesser known provisions of the Internal Revenue Code is Section 1202, which provides selling shareholders of a C corporation with a substantial tax savings if certain conditions are met. Potential tax benefits provided by Section 1202 are one the most overlooked and underutilized in the Internal Revenue Code, provided that certain requirements are met, including that the corporation is a "qualified small business" and the shares qualify as Qualified Small Business Stock (QSBS). The income tax benefits of Section 1202 became even more pronounced after the 2017 legislation that reduced the corporate tax rate from 35% to 21%.