ExpertHard1 markMultiple Choice
CPA · Question 07 · Area 1: Individual Tax
A taxpayer holds Qualified Small Business Stock (QSBS) acquired on January 1, 2012, for $500,000. In Year 1 (current year), the taxpayer sells the stock for $6,000,000. The stock meets all requirements of Section 1202. What is the amount of gain subject to federal income tax in Year 1?
A taxpayer holds Qualified Small Business Stock (QSBS) acquired on January 1, 2012, for $500,000. In Year 1 (current year), the taxpayer sells the stock for $6,000,000. The stock meets all requirements of Section 1202. What is the amount of gain subject to federal income tax in Year 1?
Answer options:
A.
$0
B.
$500,000
C.
$2,750,000
D.
$5,500,000
How to approach this question
1. Calculate Realized Gain: $6,000,000 - $500,000 = $5,500,000.<br/>2. Determine Exclusion %: Stock acquired after Sept 27, 2010 is eligible for 100% exclusion.<br/>3. Determine Limitation: Greater of $10 million OR 10 times the adjusted basis ($500k * 10 = $5M).<br/>4. Limit is $10,000,000.<br/>5. Compare Gain ($5.5M) to Limit ($10M). Entire gain is excluded.
Full Answer
A.$0✓ Correct
The stock was acquired in 2012 (after Sept 27, 2010), so it qualifies for the 100% exclusion. The gain is $5,500,000. The limitation is the greater of $10 million or 10x basis ($5 million). The limit is $10 million. Since the gain ($5.5M) is less than the limit ($10M), the entire gain is excluded. Taxable gain is $0.<br/><br/>Correction on Option B selection in JSON: I initially marked B, but analysis shows A is correct ($0). I will set A as correct in the final JSON.
Common mistakes
Applying the 50% or 75% exclusion rates applicable to older stock, or miscalculating the cap.
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