LLC vs C Corp 1202

searcher profile

April 11, 2021

by a searcher in Charleston, SC, USA

With US corporate tax rates and capital gains (above $1m) potentially moving higher... the Section 1202 on C Corps is looking even more advantageous for a qualified small business. Any chance this provision is at risk? Any other considerations folks are weighing in switching from LLC to C Corp with 1202?

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
I have had meetings with 15 Congress staff members in April. One was a chief tax advisor to Senate Banking Committee and the other the counter part in the House, 13 others were staff members on tax to Congressmen and Senators.. I had made a suggestion on bifurcating CG discussed below.
It is too early to know details of Biden tax proposal. Knowing the way things happen in DC, 1202 changes will be a last minute "sneak". We expect details in###-###-#### days.

1) I have proposed bifurcation of CG rate into "Investing CG" rate for gain resulting from investing into a company, and "Trading CG" rate for gain resulting from buying/selling stock on an exchange. "Investing" creates jobs, "Trading" does not. The thesis is, "job creation should be rewarded; holding stock for 365 should not. Comments were new idea, never heard of this, makes sense, etc. However, one chief tax advisors said that the chairman wanting one rate for every thing, and the other chief tax advisor said :"this is a backdoor to protect hedge funds", which it is not, but that is the way DC works,
We have more meetings as details come out.

2) A new proposal I am working on is something like "borrowing against appreciated assets (like stocks) will be deemed as realized gain". This hopefully will address a large amount of discussion on unrealized gain of billionaires.

Comments on the two proposals are welcome. .
commentor profile
Reply by a professional
from University of Illinois at Chicago in Deerfield, IL, USA
One thing to note: If the Biden proposals were to become law, the implication of failing to qualify for section 1202 due to insufficient holding period, asset sale, etc. would be much greater than it is currently, as the federal maximum double tax on C corporations would grow by nearly 20 points, as follows:

• Current law: 39.8% = 21% + [(1 – 21%) * (20% + 3.8%)]
• Biden proposal: 59.2% = 28% + [(1 – 28%) * (39.6% + 3.8%)]

I'm happy to share my white paper. Please contact me at redacted Best regards, Bill
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