One big beautiful exclusion: exploring the benefits of the section 1202 exclusion for start-ups

Selecting the legal entity and tax profile for the organization is sometimes an afterthought; or the decision is delegated to legal and tax advisors. The purpose of this article is to provide entrepreneurs with an education of the various legal and tax structures for business entities and an in-depth review of the income exclusion under I.R.C. section 1202 that was expanded by the One Big Beautiful Bill Act (“OBBBA”). Regulations and case law interpreting I.R.C. section 1202 are minimal. Therefore, the research for this article was conducted mostly through consulting the Bloomberg Tax Research library and publicly available commentary written by tax practitioners. ChatGPT was consulted for technical accuracy and a general review, but not content creation. I.R.C. section 1202 offers generous tax benefits for entrepreneurs contemplating selling their business. For many businesses that anticipate a profitable exit strategy, organizing as a C corporation, or organizing as an LLC with a view to converting to a C corporation has become a worthwhile tax strategy. The primary practical implication of this article is to empower entrepreneurs and founders to actively participate in the business entity selection process. Most articles that address tax issues are written for the tax professional audience with highly technical jargon. This article was written with the entrepreneur or founder in mind who may have little or no tax or legal background.