Anyone with experience on Section 1202? - Searchfunder

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by a searcher from University of Pennsylvania - The Wharton School
in Miami, FL, USA

4yrs ago

Anyone with experience on Section 1202?

I am working on an asset purchase deal and need to decide whether to form the new entity as an S Corp or as a C Corp for the purpose of taking advantage of the Section 1202 capital gains exemption down the road when we exit (redacted).

Interested to hear from any buyers who have been through this decision process and how you landed where you did. Also interested to hear from any lawyers/accountants who could share thoughts on the tradeoffs and potentially advise me on the decision.

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reply by a searcher 4yrs ago
from University of Virginia in Los Angeles, CA, USA

^redacted‌, my partner and I are in the process of closing a deal that's structured as an asset purchase where we are incorporating as a C-Corp to take advantage of 1202 tax exemption. You certainly want to work with (i) a knowledgeable accounting firm and (ii) an experienced tax lawyer to ensure the business qualifies for QSBS and that you yourself are establishing the necessary cost-basis that allows you to eventually exclude the max of $10M or 10x cost basis upon exit.

Two key considerations prior to making your decision: 1) are you planning on holding for more than 5 years, or are you looking to do a quicker 3-4 year flip? 2) are the returns predominately driven by proceeds upon exit, or via dividends throughout the holding period? Another important piece to think through is tax rates, and the potential of corporate and/or capital gains taxes going up... right now we believe that in either way, if you have a longer-term, growth-oriented investment where most of the gains will be realized upon exit, C-Corp is the way to go (not to say you can't also drive returns via dividends with a C-Corp). Some may push back and ask, "well doesn't PE not like to buy C-Corps so you're limiting your buyer universe?", or "well what about QBI deductions that you can only use in an LLC?", or "well don't you want the ability to pay dividends?" All of which there are answers to, but that'll take a longer post.

reply by an intermediary 4yrs ago
from The University of Chicago in Chicago, IL, USA

I have not seen 1202 when one buys a business with long history (like searchers do). A successful searcher would prefer to hang-on and continue to grow.
1202 is good for start-ups with high growth potential and an exit after 5-yr for mega multiple. Investors in such business also do not want K1 taxes.
With upcoming tax increases, 1202 use is likely to increase. But it is my understanding that changes to 1202 are under consideration.

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