QSBS stands for “Qualified Small Business Stock” which is, regulated by the Internal Revenue Service (IRS) under code section 1202 and offers tax benefits to accredited investors. QSBS is a tax benefit to investors on a federal and in some cases also extends to a state level. The tax benefit excludes 100% of capital gains on the sale of QSBS held for 5 years with tax savings up to the greater of $10 million or 10x the initial investment. Below are high-level rules and here is a history of QSBS.
To be eligible for QSBS here are the main requirements on a company and investor level:
- The company must be classified as a C Corporation.
- What is a C Corporation?
- Does the company have to be a C Corporation at the time of incorporation?
- Is a C Corporation more advantageous than other legal entities?
- Must be a domestic corporation.
- What qualifies as a domestic corporation?
- Has to operate within a qualifying QSBS industry.
- What industries qualify for QSBS?
- What if the company has a business unit that does not qualify for QSBS?
- QSBS must be held for at a minimum of 5 years.
- What if I sell my stock before 5 years?
- When does the timeline start?
- The FMV of the assets on a tax basis must not exceed $50 million.
- Do the assets have to be under $50 million before and after the investment?
- Does the asset limit put a threshold on the investment?
- Can the FMV of the assets ever be above $50 million?
- There must be no stock redemptions before or after the sale of QSBS.
- What are stock redemptions?
- When do stock redemptions affect QSBS qualification?
- The investor must be an individual or pass-through entity.
- What is a pass-through entity?
- A QSBS transaction must be a direct purchase from the company.
- What is a direct purchase?
- Can I make a non-cash purchase?
- The QSBS capital gain allocation can only decrease, not increase.
- What if I buy more stock?
- How could my capital gain decrease?
- If QSBS is sold before 5 years you can elect a section 1045 rollover.
- What is section 1045?
- When do I have to rollover the investment?
- Do I have to reinvest all of the capital gains?
- Does my QSBS capital gains timeline change?
- The capital gain tax exclusion is limited to the greater of $10 million or 10 times the initial investment.
- How do I calculate my potential tax savings?
Frequently Asked Questions
What is qualified small business stock (QSBS)?
Can I lose QSBS qualification and get it back?
What country does the company have to be located in for QSBS treatment?
What documentation do I have to provide for QSBS?
Can I give employees QSBS?
Do convertible notes count as QSBS?
When does the clock start ticking for QSBS?
What if I sell my QSBS before five years?
Should I gift QSBS to a charity?
Do I have to pay payroll taxes on QSBS given to employees?
What is the corporate tax rate?
Why should I buy QSBS?
Do I have to pay cash for QSBS?
How does my divorce affect QSBS?
What is the state tax treatment of QSBS?
What is a tax exclusion?
How do I apply for QSBS?
How do I calculate section 1202 tax benefit?
What is the history of QSBS?
Does California tax QSBS?
Does New York tax QSBS?
Can I take section 1202 on carried interest?
What are the dates of QSBS tax exclusions?
What is the holding period of QSBS?
What company types qualify as QSBS?
Who can own QSBS?
What is the tax exclusion on QSBS?
How do I rollover my QSBS investment?
What is section 1045?
When can I take section 1045 rollover?
Can I incentivize employees with QSBS?
How do stock redemptions affect QSBS?
Qualified small business stock requirement?
IRS section 1202 qualified small business stock checklist?
What is the holding period for QSBS?
Is QSBS excluded from AMT?
Is QSBS excluded from NII?
When do I know that QSBS will no longer apply?
Is there a threshold on the size of the investment?
Is there a threshold on the size of the company?
Can I transfer my QSBS?
Can I buy QSBS from someone else?
Can I gift QSBS?
How a down market may affect QSBS eligibility?
What to consider in follow-on rounds to maintain QSBS tax exclusion?
Can I increase my QSBS?