I may have answered my own question. While researching, I found the following:

“As a practical matter, the benefits of QSBS are available to any taxpayer other than a C corporation. QSBS can be issued to a limited liability company, other partnerships, trusts or S corporations. IRC § 1202 has rules that address the handling of QSBS’ benefits among a pass-through entity’s owners.”

So it seems that I am in the clear as long as I make sure that my S corporation is the one that claims the exclusion and then passes through the benefits to me as a shareholder.

Sorry for the conflict with your employer and the miscommunications/misunderstandings regarding pay. Let me say that first…

Second, the accounting you describe isn’t completely “out of tune” with the way the PPP works/worked. It’s very possible employer used PPP money to pay you the past-due commissions you were due… and that he or she thought they needed to do so as a weekly payroll amount. Without getting into gritty details, the “bookkeeping advice” and ‘instructions” the SBA provided PPP borrowers was pretty skimpy. Lots of PPP borrowers tried to do their accounting of payroll costs so the amounts were very “regular” and “uniform.”

I think the only suggestion I have would be to discuss with your employer this issue. It does seem like if she or he had you work during the covered period that you deserve pay for that. And then if you were owed money for before the covered period that you’re owed additional amounts for that.

Good luck!

Thank you very much,

S. Owens

I think you do what the bank wants. It sounds like they have some worry about whether or not you’re really in business.

You need to talk with the bank, but can I suggest you first talk with your accountant? She or he can help you determine whether you can get bank and SBA to just give you forgiveness on the basis of your payroll expenses during the 24 weeks that followed you getting the loan.

My 1 man S-corporation did some consulting work for a C corp startup and as part of my compensation, I accepted a convertible note, which has since become preferred equity shares.

I saw that one of the Section 1202 rules for being able to avoid capital gains taxes is that “the investor must not be a corporation.” I’m wondering whether I messed up by having the shares issued to my S corp instead of to me personally, or if as a 1 man S corp any gains after 5 years would still get favorable QSBS treatment?