Reporting of the Section 1202 gain depends on (a) the tax form (b) whether it is owned through a pass-through entity, and (c) the timing of payments received from the sale of the QSBS. There are two forms (i) Form 1099-DIV and (ii) Form 2439. If the QSBS is owned indirectly through a pass-through entity than you will receive your gains on a k-1. The timing of the payments can cause confusion if the gain is from an installment sale of QSBS.
Individual Reporting
If Form 1099-DIV is received if the QSBS long-term gains have been received. Section 1202 gain will appear in box 2c of the form and will be reported on Schedule D, line 13, of your individual tax return. On line 18 & 19 of Schedule D, enter as a positive number the amount of your allowable exclusion on line 2 of the 28% Rate Gain Worksheet. In column (a) of Form 8949, Part II, you will enter the name of the corporation sold. Also on Form 8949, you will enter in column (f), “Q,” and in column (g), the amount of the excluded gain as a negative number. On line 18 & 19 of Schedule D, enter as a positive number the amount of your allowable exclusion on line 2 of the 28% Rate Gain Worksheet.
If Form 2439 is received it means that your capital gains have been undistributed. In box 1c of the form, the Section 1202 gain will be reported and box 1a will include the full gain. Report the full gain from box 1a on Schedule D, line 11. In column (a) of Form 8949, Part II, you will enter the name of the corporation sold. Also on Form 8949, you will enter in column (f), “Q,” and in column (g), the amount of the excluded gain as a negative number. On line 18 & 19 of Schedule D, enter as a positive number the amount of your allowable exclusion on line 2 of the 28% Rate Gain Worksheet.
Pass-through Entity Reporting
QSBS gains received through a pass-through entity will be reported on line 10 of the k-1 received through the 1120S (S Corporation) or line 11 of the k-1 received through a 1065 (Partnership) tax return. Attached to the k-1 will be a statement for each sale or exchange (a) the name of the corporation that issued the QSB stock, (b) the partner’s share of the partnership’s adjusted basis and sales price of the QSB stock, and (c) the dates the QSB stock was bought and sold
*The k-1 gain will be reported the same as if Form 2439 was received.
Installment Sale Reporting
If the QSBS gain is received in an installment sale than the sale will be reported on Form 6252. The long-term gain reported on Form 6252 will be also be reported on line 11 of Schedule D. You will have to determine the eligible gain each year of the installment to be reported by multiplying the exclusion by a percentage of the gains received each year of the installment schedule. In column (a) of Form 8949, Part II, you will enter the name of the corporation sold. Also on Form 8949, you will enter in column (f), “Q,” and in column (g), the amount of the excluded gain as a negative number. On line 18 & 19 of Schedule D, enter as a positive number the amount of your allowable exclusion on line 2 of the 28% Rate Gain Worksheet.
All treatments will report alternative minimum tax (AMT) if your exclusion is below 100%. If this is true you will report 7% of your allowable exclusion on line 13 of Form 6251.
1 Pub. 550
2 Partner’s Instructions for Schedule K-1 (Form 1065)
3 Shareholder’s Instructions for Schedule K-1 (Form 1120-S)
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
