exclude up to 100 % of the gain from the sale of qualified small business stock( QSBS) if certain conditions are met, including a three- to five-year holding period and original issuance of the stock. The exclusion applies to gains up to $ 15 million or 10 times the shareholder’ s basis, whichever is greater. To qualify, the C corp must have gross assets of $ 75 million or less at the time of issuance and operate an active business in a qualified trade or business. This can significantly reduce or eliminate capital gains tax on a successful exit, making the C corp structure particularly appealing to founders and early investors.
Potential Section 1244 loss treatment: Section 1244 stock allows individual shareholders of a qualifying C corp or S corp to treat losses from the sale, exchange or worthlessness of the stock as ordinary losses rather than capital losses. This may allow the shareholder to offset ordinary income, subject to annual limits of $ 50,000, or $ 100,000 for married taxpayers filing jointly. The stock must generally be originally issued for money or property— not services— and meet other Section 1244 requirements. The benefit applies to the shareholder and doesn’ t provide a direct tax deduction to the corporation. Section 1202 may provide an upside gain exclusion for separately qualifying C corp stock, while Section 1244 may provide downside ordinary-loss treatment, but each provision has its own eligibility rules and must be tested independently.
The C Corp Bottom Line
While a C corp is often not the first choice for many closely held businesses, companies formed as C corps frequently remain that way. Some owners don’ t see a compelling reason to change, while others decide the tax and administrative consequences of conversion outweigh the potential benefits.
S Corporations Basics
To qualify as an S corp under IRC § 1361( b), a business must first elect to be treated as one. This election must be made by all shareholders and submitted within the appropriate time frame( generally within two months and 15 days after the beginning of the tax year the election is to take effect).
Once elected, a business must:
• Have only allowable shareholders, including individuals, certain trusts and estates.( Partnerships, corporations and nonresident aliens are generally not permitted.)
• Have only one class of stock, meaning all shares confer identical rights to distribution and liquidation proceeds. However, voting rights may differ.
• Not be an ineligible corporation, such as certain financial institutions, insurance companies or domestic international sales corporations.
Criteria must be continuously met to maintain S corp status.
Advantages
An S corp offers several advantages for small and closely held businesses. One of the most notable is pass-through taxation, which allows income, deductions and credits to flow through to the shareholders’ personal tax returns, avoiding the double taxation faced by traditional C corps. Other benefits include:
• Pass-through taxation, allowing income, deductions and credits to flow through to shareholders’ personal returns.
• Limited liability protection for shareholders.
• Efficiency through a combination of reasonable salary and distributions, potentially reducing self-employment taxes.
• Potential state tax savings through pass-through entity( PTE) elections, allowing certain business entities to choose to pay state income tax at the entity level rather than passing the tax obligation through to individual owners. This election serves as a workaround to the federal $ 40,400 cap on state and local tax( SALT) deductions.
• Losses deductible against other personal income such as wages, interest, dividends or income from another business( subject to basis limitations).
• Section 199A generally allows an S corp shareholder to deduct up to 20 % of qualified business income reported on the shareholder’ s K-1.( May be limited by taxable income, W-2 wages, qualified property and special rules for specified service businesses.)
These benefits make the S corp structure especially attractive for businesses seeking tax efficiency and legal protection.
• Be a domestic corporation.
• Have no more than 100 shareholders.
06 | VIEWPOINTS: ISSUE 2 2026