Accessing the Benefits of Qualified Small Business Stock

Qualified small business stock (QSBS) is shares of a qualified small business. The benefit of QSBS is a tax exclusion from 50% up to 100% of the gain on the sale of QSBS. This is an extremely valuable exclusion making it important to know if you qualify.

In order to qualify for the QSBS designation, the shareholder must satisfy all of the following:

  • The shareholder cannot be a corporation.
  • The shareholder must have acquired the shares at the original issue and not on the secondary market.
  • The shareholder must have purchased the stock with cash or property, or services.
  • The shareholder must have held the stock for at least five years.
  • At least 80% of the issuing corporation’s assets must be used in its qualified trade or business.
  • The business must be a Qualified Small Business, which means it is an active C corporation, whose gross assets do not exceed $50 million at the time of stock issuance.

There are many issues that come out of these criteria, such as: what if the business was originally an S corporation and later changed to C corporation; what if the business merged with another business; what if the shareholder only receives RSU or options?

If these rules are met, the IRS allows:

  • 100% capital gains exclusion for QSBS acquired after Sept. 27, 2010.
  • 75% capital gains exclusion for QSBS acquired on or after Feb. 18, 2009, and before Sept. 27, 2010.
  • 50% capital gains exclusion for QSBS acquired on or after Aug. 11, 1993, and before Feb. 17, 2009.

With these huge potential tax breaks, but potentially complicated questions regarding the requirements, it is important that any taxpayer that thinks their business may qualify for the QSBS designation consult a tax professional.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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