How Uber’s C-suite got a $10m tax break…and you can too

Picture this: you’ve had a great year in sales, maybe landed that big account or finally closed that tricky deal. 

Now, with your W-2 income, investments and side projects, you’re looking at some nice gains—but also a big tax bill. 

What if there was a way to keep a significant chunk of that money by using a little-known tax break? 

Enter Section 1202 Qualified Small Business Stock, or QSBS.

Section 1202 is like a “get-out-of-taxes-free” card for certain business investments. If you meet the requirements, you could save a ton of money.

Today we’re going to break down what you need to know about Section 1202, so you don’t miss out on this big opportunity.

What is Section 1202 Stock?

Section 1202 QSBS is a special kind of stock in small businesses. It’s designed to encourage people to invest in growing companies. Here’s the basics:

• Must Be a Small Business: The company needs to be a small one—worth $50 million or less when you invest.

• Hold It for 5 Years: To get the tax benefit, you need to hold on to the stock for at least 5 years.

• Bought Directly: You need to buy the stock directly from the company. Stock bought on the secondary market doesn’t count.

In short, Section 1202 applies if you’re buying into a smaller business and holding your shares for a decent stretch of time.

The Tax Benefits of Section 1202 Stock

Now, here’s the exciting part—the tax perks!

If you qualify, you could exclude up to 100% of the gains on these stocks from your income! Yes, you read that right. Depending on when the stock was issued, Section 1202 allows different percentages of the gains to be excluded:

• 50% if bought before February 18, 2009.

• 75% if bought between February 18, 2009, and September 27, 2010.

• 100% if bought after September 27, 2010.

Let’s say you invested $100,000 in a qualifying small business, and after five years, your shares are worth $500,000. Normally, you’d owe tax on that $400,000 gain. But if the stock is Section 1202 qualified, you might pay zero on that gain!

And as I referenced in the email header, this is one of the tax tools that Silicon Valley tech founders have been using for years to reduce or eliminate their tax liability when they sell shares of their company stock. 

Common Pitfalls to Avoid

As amazing as this tax break sounds, there are a few things to watch out for:

1. Not Meeting the Holding Period: You need to hold the stock for at least 5 years to qualify. Selling even a day too early can cost you the exclusion.

2. Investing in Too Big a Business: Remember, the business must have less than $50 million in assets when you invest. Double-check before you buy.

3. Missing Required Paperwork: Keep track of documentation to show you bought the stock directly and meet all other requirements. This could be a lifesaver if the IRS asks questions.

4. Alternative Minimum Tax (AMT): In some cases, this exclusion can trigger the Alternative Minimum Tax, which is a different way of calculating your taxes. It’s not a common problem, but one to know about, especially if your income is already high.

Extra Tips 

Here’s the thing: Section 1202 QSBS isn’t just for folks investing in startups. If you’re thinking of investing in a smaller side business or helping a startup, this could be a savvy move.

• Team Up with Experts: Because the rules around Section 1202 can get detailed, talk to your tax advisor or financial planner. They’ll help make sure you qualify.

• Consider the Long Haul: Since the 5-year holding period is a must, think of QSBS as a longer-term investment. This isn’t for flipping stocks; it’s for those with patience to see their gains multiply tax-free.

Conclusion: Invest Smart, Save Big

Section 1202 QSBS is a fantastic tool for those who invest in small businesses, especially for high earners like you. Not only can you grow your wealth, but you can keep more of it in your pocket instead of sending it to the IRS.

So, the next time you’re thinking about investing, ask yourself: Can I make this a Section 1202 investment? With a bit of planning and a dash of patience, you could have big wins ahead.

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Whenever you’re ready, here are a couple of ways in which I can help you save money on your taxes:

1. Book a free Strategy Call: Provide me with some financial information before the call and in 45 min to an hour I’ll give you every strategy, tactic, tool, and adjustment I’d make to your financial life to help you pay thousands less in taxes and build wealth faster.

2. Book me as a Keynote Speak: In my talks I share the practical strategies, principles, and rules anyone can adopt to save them thousands of dollars a year on taxes and build wealth more quickly.  

3. ​Start working together: Feel like you've read enough and are ready to get some help implementing the things we talk about here in this newsletter? Respond to this email letting me know and we can talk about next steps.