QSBS is stock in a C corporation that meets the conditions of being a qualified small business corporation (QSBC). 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.
Benefits depend on when you acquired equity in your early stage company.
When QSBS is held for more than five years, a portion of the gain from the sale of the QSBS can be excluded from federal income. The amount of gain eligible for exclusion depends on when you acquired the QSBS shares. Use the Andersen Tax QSBS Calculator to determine how much of your gains will be eligible for exclusion once your five year holding period expires.
Stock acquired between 8/11/93 and 2/17/09 is eligible for 50% gain exclusion, subject to a 7% AMT addback.
Stock acquired between 2/18/09 and 9/27/10 is eligible for 75% gain exclusion, subject to a 7% AMT addback.
Stock acquired after 9/28/10 is eligible for 100% gain exclusion without any AMT addback.
During substantially all of the taxpayer’s holdings period for the stock, at least 80% of the corporation’s assets have been used in the active conduct of a trade or business that is in a category other than any of the following:
- Professional services (such as health, law, engineering, architecture, and brokerage services)
- Banking, insurance, financing, leasing, or similar businesses
- Mining or natural resource production or extraction
- Operating a hotel, motel, restaurant, or similar business
- “Exclusion” (Section 1202): Individual must hold QSBS for at least five years from the date he/she acquires the shares (if shares are from stock options acquisition date is the exercise date, not the date of grant)
- “Rollover” (Section 1045): Individual must hold QSBS for at least six months