Qualified Small Business Stock (better known as QSBS) and Opportunity Zones (OZ) are tax codes as defined by the Internal Revenue Code that offer tax benefits meant to drive economic growth by incentivizing investment. For QSBS, that means investment in small business and for OZs that means investment in economically distressed areas designated as Opportunity Zones. Interested in learning more? Let’s start with the basics.
The 5-year difference
One of the biggest differences between investing in QSBS versus OZ is that while you have to hold QSBS-eligible stock for at least five years in order to qualify for the tax benefit and exclude capital gains, while with an OZ you must hold your investment for at least 10 years to permanently exclude any gain from a qualifying investment when it is sold or exchanged.
Eligible capital
For QSBS, as set forth in Section 1202 of the Internal Revenue Code, investors can invest any capital in a qualified small business, while OZ investments require that capital gains are the only acceptable capital to use for investment.
Tax benefits
QSBS only allows for the exclusion of capital gains up to $10 million or 10X the adjusted basis, but there are no minimum or maximum investments required by OZ legislation and investors can defer until 2027.
Rollover capabilities
Using Section 1045 of the Internal Revenue Code, it’s possible to rollover QSBS, deferring capital gains taxes on the sales of QSBS if proceeds from the sale are reinvested in another eligible QSBS within a specific time frame. Currently, there is no rollover possibility for OZ investing.
While both QSBS and OZ have their pros and cons, investing in QSBS can mean a short 5-year investment that lets you support a small business while potentially receiving a meaningful tax break. If you think investing in QSBS might be for you, contact us today.
