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Section 1202 provides for an exclusion of the gain on the sale or exchange of qualified small business stock. The eligible exclusion amount varies and is determined by the date the stock was acquired and how long it was held.

Gains from 1120S or 1065 K-1 activities

To qualify for the section 1202 exclusion from a pass-through entity, the shareholder/partner must have held the interest on the date the pass-through entity acquired the qualified small business stock, and at all times thereafter, until the stock was sold. UltraTax CS reports the entire section 1202 gain on Form 8949, Part II, Box F and the exclusion is recorded as an adjustment in column G.

If the qualified small business stock sale was from a partner's or shareholder's K-1:

1. Open the K1 1064, 1120S input folder.
2. Click the K1 screen.
3. Mark the Qualifies for section 1202 exclusion field
4. Click the K1-2 screen.
5. Open the Section 1202 gain statement and enter the sale information.

Do not includes Section 1202 gains in the Net long-term capital gain (loss) field.

Gains from a grantor trust K-1

If the section 1202 gain is from a grantor trust:

1. Open the K1 1041 input folder.
2. Click the K1T screen.
3. Mark the Grantor trust field. If this field isn't marked, the "Grantor Trust Income, Expenses, and Other Information" section will be grayed out.
4. Enter the amount of long-term capital gain that is eligible for the 1202 exclusion in one of the Section 1202 gain fields at the bottom of the screen.

Do not includes Section 1202 gains in the Net long-term capital gain (loss) field.

UltraTax CS uses the 1202 amount to calculate the percentage allowed as exclusion and enters a reduction on Schedule D for the 1202 exclusion. UltraTax CS also includes the amount after exclusion in the 28% Rate Capital Gain Worksheet, on Form 4952, and as a nonbusiness capital gain in the NOL worksheet.

All other 1202 gains

For all other qualified small business stock sales:

1. Open the Income input folder.
2. Click either the B&D screen or the Broker screen. Only use the Broker screen for consolidated broker statements.
3. From the B&D screen, open the Schedule for detail statement. Or, from the Broker screen, open the Proceeds from broker transactions statement.
4. Complete these fields:
   • TSJ: Code the sale as Taxpayer, Spouse, or Joint. This field does not display if you come from the Broker screen because the entire Broker screen is coded as Taxpayer, Spouse, or Joint and the code is automatically entered in the Broker and barter exchange transactions statement field.
   • 8949 Box: Enter a code to indicate whether the sale was reported on the 1099B and if the basis was reported to the IRS.
   • 1099B Errors: This field is used to identify errors that were reported to the IRS on Form 1099B. Any adjustments needed can be made in the Adj to G/L column.
   • Type: Choose code V, X, Y, or Z to indicate how much of the gain qualifies as an exclusion. The taxable portion of items coded X, Y or Z are subject to the 28% capital gains rates and the AMT 7% preference. UltraTax CS includes the amount after the exclusion in the 28% Rate Capital Gain Tax Worksheet, Form 4952, and as a nonbusiness capital gain in the NOL worksheet. Since there is no taxable gain for code V transactions, they do not affect these worksheets.
   • Sale Price: Enter the amount before exclusion.
   • Cost/Basis: Enter the amount before exclusion.
   • Adj to G/L: UltraTax CS will automatically calculate the exclusion amount based on the information in the Type, Sales Price, and Cost/Basis fields. If additional adjustments are necessary for this transaction, they must be made in this field.

The transaction will report on Form 8949 with adjustment code ”Q” in Column (f). Any taxable portion is subject to the 28% capital gains rates and the AMT 7% preference. Therefore, do not combine non-Section 1202 sales with Section 1202 gains, or combine Section 1202 gains subject to different exclusion amounts. UltraTax CS includes the amount after the exclusion in the 28% Rate Capital Gain Tax Worksheet, Form 4952, and as a nonbusiness capital gain in the NOL worksheet.

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