In a recent webinar, Damon Elder—publisher of the DI Wire, interviewed Justin Reich—president and CEO of Seedbrite Ventures, Brad Updike—partner with Mick Law, and Matt Chancey—a private wealth advisor and strategist with CoastalOne to discuss IRS Code section 1202, which provides for a capital gains tax exclusion for investment in qualified small business stock (QSBS). Here’s what you should know:
In the interview, Reich mentions that while many people haven’t heard of QSBS, it is an extremely powerful tool for investors. Originating in 1993, this provision is unique because it has only improved over time – going from a 50 percent exclusion of capital gains to 75 percent and eventually a hundred percent in 2015. In fact, recent legislation is trying to lower the hold period requirement from five years to three years, making this provision even more accessible and more powerful.
Updike then discusses three key attributes of qualified small business stock. First, stock issued by a C corporation whose business activities qualify for gain exclusion-manufacturing, technology, research and development, etc. Second, the issuing C Corp must have gross assets of less than 50 million dollars at the time the stock is issued. Third, 80 percent of the target companies’ assets must be used in an active trader business. He believes 1202 has a very large reach.
Chancey talks about how this offers a similar concept to opportunity zones in that it moves capital into a place where it could help economic expansion. It is an accessible tool that should be considered by investors that feel the restrictiveness of a five-year hold is outweighed by the tax benefits. However, Updike notes it is also important to understand what happens at the end of the five-year period as certain transactions could blow the exemption.
Want to know more? To follow along with this fascinating interview and to learn more about investing in QSBS, click here to watch the whole interview.
