Already a taxpayer needs to tread lightly when reporting a Section 1202 gain from the sale of QSBS on their tax return, but reporting a Section 1045 rollover(s) can throw a curveball at their tax accountant. The same as a normal QSBS transaction the taxpayer needs to maintain the correct documentation throughout the holding period of the stock but will need to maintain even more with a Section 1045 rollover. Generally, it is good to maintain the following documents with a normal QSBS transaction:
- Articles of Incorporation
- Stock Purchase Agreement
- At issuance: Tax Opinion Letter regarding classification of holdings as QSBS
- At sale: Tax Opinion Letter regarding evaluation and quantification of QSBS exclusion
- A Stock Sale Agreement
With a Section 1045 rollover, the taxpayer will need to maintain the above documentation for the original QSBS plus the same documentation for the replacement QSBS. This is because the original QSBS is (i) part of the five-year holding period, (ii) determinate of basis in the replacement QSBS, (iii) used to determine if the replacement QSBS was repurchased in 60 days, (iv) proof that the original QSBS was held for at least 6 months, and (v) to display that the replacement QSBS qualifies for Section 1202. The purchase is not reported on the taxes only the postponed gain is but it is necessary to have the right documentation in case of an audit.
Now to report a Section 1045 rollover(s) on a tax return is quite intuitive. It is similar to reporting a recognizable QSBS tax exclusion. First, report the sale of the original QSBS on Form 8949 the same as reporting a Section 1202 gain but use code “R” instead of code “Q” in column (f) of the form. Also, enter the postponed gain on column (g) as a negative number. Last, report the information from Form 8949 onto Schedule D under either Part I or II, depending on whether the original QSBS was long or short-term.