The QSBS Tax Exemption – Don’t Miss Out
What is the Qualified Small Business Stock (QSBS) tax exemption?
The Qualified Small Business Stock (QSBS) tax exemption may allow you to exclude up to $10 million of gain when you sell a stake in a qualified startup or small business.
Sometimes referred to as Section 1202, here’s what you need to know about this often-overlooked tax break.
The QSBS exclusion is most commonly applied in situations when a founder sells his or her company, or when investors in a private equity fund receive an in-kind distribution of post-IPO shares after a portfolio company in the fund goes public.
A QSBS refers to an active domestic C corporation whose gross assets—valued at the original cost—do not exceed $50 million on and immediately after its stock issuance.
Individuals are able to receive tax benefits if they hold QSBS as long as certain criteria are met.
Qualified small business stock is a stock that must meet this criteria:
- It must be stock in a C corporation.
- It must have been originally issued after August 10, 1993.
- The corporation must have total gross assets of $50 million or less at all times after August 9, 1993, and before it issued the stock. Its total gross assets immediately after it issued the stock must also be $50 million or less.
- When figuring out the corporation’s total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation.
- You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as payment for services provided to the corporation (other than services performed as an underwriter of the stock). In certain cases, your stock may also meet this test if you acquired it from another person who met this test, or through a conversion or trade of qualified small business stock that you held.
- The corporation must have met the active business test, defined next, and must have been a C corporation during substantially all the time you held the stock.
- Within the period beginning two years before and ending two years after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from you or a related party.
- Within the period beginning one year before and ending one year after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from anyone, unless the total value of the stock it bought is five percent or less of the total value of all its stock.
It’s important to know about the QSBS tax exemption and keep it on your radar. However, it is complicated and we recommend working with a tax and legal advisor.
We also recommend reading the following from our partners for more information:
- Silicon Valley Bank – Understanding Qualified Small Business Stock, the Capital Gains Exemption
- Cooley – What is the Qualified Small Business Stock and Why Does it Matter for You and Your Startup
Burkland provides expert CFO services, accounting services, and tax services to startups across the United States. Reach out to us to learn more about how we can help your startup or portfolio company.