QSBS: Let’s Get Into It

Qualified Small Business Stock (better known as QSBS) are tax codes as defined by the Internal Revenue Code that offer tax benefits meant to drive economic growth by incentivizing investment in small businesses. As written in Section 1202, part of the Revenue Reconciliation Act of 1993 aimed at promoting investment in small business and startup ventures, QSBS lets shareholders of qualified small businesses stock realize capital gains without paying taxes. That’s right. 100% of gain is excluded. Sounds good, right? So, let’s go over the details you need to know before you invest.

First off, do you even qualify? The requirements for shareholders include:

1. No corporations. QSBS is set up for individuals, trusts, or pass-through entities only.
2. You can satisfy a holding period. QSBS requires a five-year minimum hold on investment.

Note: You can also only exclude capital gains up to $10 million or 10X the adjusted basis or original asset value of the investment.  It is possible to rollover QSBS, deferring capital gains taxes on the sales of QSBS but only if proceeds from the sale are reinvested in another eligible QSBS within a specific time frame. 

To take advantage of this exemption, you also need to invest in a qualified small business, which means they need to meet four criteria:

1. Have assets of less than $50 million, before and after the issuance of stock.
2. Be an active C-corp in the United States. No S corporations allowed, and the company must also be currently actively engaged in business operations. 
3. Be able to issue stock directly. Basically, stock must be acquired directly from the issuer in exchange for cash or property. 
4. Not be in a prohibited industry and the list is long. No one in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business in which the principal asset is the reputation or skill of one or more of its employees. That said, industries that generally qualify include tech, wholesale, retail, and manufacturing.

To learn more about the tax benefits of investing in QSBS companies, contact us today.