Qualified Small Business Stock (QSBS) Planning
Qualified Small Business Stock (QSBS) can provide substantial federal tax savings for founders and investors who meet Internal Revenue Code section 1202’s requirements. However, qualifying for these benefits often depends on decisions made years before a business is sold.
Hone Maxwell LLP advises founders, investors and closely held businesses on strategies designed to preserve and maximize available QSBS benefits while coordinating broader tax, business and estate planning objectives.
QSBS Eligibility and Planning
Determining whether stock qualifies for QSBS treatment requires careful analysis of the company’s structure, assets, business activities and ownership history. We help clients evaluate eligibility and identify planning opportunities, including using trusts to stack QSBS, before financing rounds, ownership changes and exit transactions.
Business Structuring
Entity selection and business structure can directly affect QSBS eligibility. We work with founders and business owners to structure companies in a manner that supports long-term tax planning goals while remaining aligned with operational and growth objectives.
Exit and Succession Planning
The greatest QSBS benefits are often realized when planning begins well before a liquidity event. We advise clients on strategies involving business sales, gifts, trusts and succession planning that may help preserve available section 1202 benefits while integrating with their broader estate and tax plans.
International Tax Considerations
For founders, investors and families with international ties, QSBS planning often involves additional tax and reporting considerations. HMLLP’s international tax attorneys coordinate domestic and cross-border planning to help clients address U.S. and international tax implications while pursuing available QSBS benefits.
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Qualified Small Business Stock refers to eligible stock issued by certain U.S. C-corporations that may qualify for significant federal capital gains tax exclusions under section 1202 of the Internal Revenue Code if specific requirements are met.
Eligible taxpayers may generally exclude up to the greater of $10 million or 10 times their adjusted basis in the stock, depending on the structure of the investment and other qualifying factors.
Yes. Founders and investors often face different planning considerations related to stock issuance timing, valuation, basis, equity compensation structures, due diligence, and ownership vehicles.
Potentially, but cross-border ownership structures, residency status, tax treaties, and international reporting obligations can create additional complexity. International founders and investors should evaluate QSBS planning alongside broader international tax considerations.
QSBS stacking is an advanced tax planning strategy that may increase the federal capital gains tax exclusion available under Internal Revenue Code section 1202. By transferring QSBS to properly structured non-grantor trusts before a business sale, multiple taxpayers may each qualify for their own section 1202 exclusion, potentially allowing significantly more gain to be excluded from federal capital gains tax.
The most effective time to evaluate QSBS stacking is well before a liquidity event or letter of intent. Because the strategy relies on completed gifts, properly structured trusts, and genuine transfers made before a sale is imminent, waiting until a transaction is underway may eliminate or significantly limit available planning opportunities.
No. A company’s stock must first qualify as QSBS under section 1202, and the strategy must be carefully tailored to the founder’s circumstances. Factors such as the type of business, ownership structure, holding period, trust design, and timing of any transfers all influence whether QSBS stacking is appropriate. Founders should work with experienced tax counsel to evaluate eligibility and implement the strategy correctly.