Qualified Small Business Stock (QSBS)
If you own Qualified Small Business Stock (QSBS), you may be eligible to eliminate tax on all or a large portion of your gain when you sell. Many founders and entrepreneurs who are unaware of the existence and benefits of QSBS may be missing out on potential savings. Rules applying to QSBS were created to urge investment in certain small businesses by allowing investors the opportunity to avoid tax on some or all of their gain from the disposition of QSBS. The specific requirements to determine whether or not a stock is QSBS are explained in detail below.
Andersen Tax professionals focus on the unique circumstances of entrepreneurs and their companies. We are well-versed in the intricacies of QSBS, the associated filings and documentation, and steps that may be needed to meet the requirements.
Why is it Important?
Gains from selling Qualified Small Business Stock (QSBS) may be eligible for up to 100% exclusion from federal income tax – which means, when you sell your qualifying stocks, you could avoid paying federal tax on gains of up to $10 million or 10x your tax basis (basis for this purpose is equal to the amount of cash plus the fair market value of any property contributed to the corporation in exchange for the stock). For example, if you invested $2 million in a QSBS in 2013, you could sell that stock five or more years later for up to $22 million and pay zero federal income tax on that gain, a savings of nearly $5 million at today's rates. Companies and individuals must follow certain requirements in order to qualify.
Basic Requirements of Qualified Small Business Stock
• Company is a domestic C corporation
• Stock is issued after August 10, 1993
• Stock is acquired by taxpayer directly from the company for money, property (other than stock), or services (limited exceptions to this rule)
• The tax basis of the total gross assets of the corporation at all times from August 10, 1993 until immediately after the issuance of the taxpayer’s stock must be less than $50 million (for assets contributed to the corporation, tax basis is determined based on the fair market value of the assets immediately after contribution)
• Certain redemptions can retroactively eliminate QSBS treatment
Click here for more information about specific QSBS rules.