It is not easy for an investor, especially as a minority investor with limited, if any, visibility into the Company’s operations, to know if the Company has used at least 80% of its assets towards activities that qualify for QSBS.
Unless the Company changed directions in a significant … Read More
The term “substantially all” is used several times in the QSBS criteria per Section 1202, but how long is “substantially all”, could it be a simple majority of the time held, or does it need to be longer?
While “substantially all” is not defined in terms of a … Read More
“Aggregate gross assets” are defined in Section 1202 (d)(2)(A) as “the amount of cash and the aggregate adjusted bases of other property held by the corporation”. Some considerations regarding the assets included in the Active Business Requirement include:
Cumulatively if over 20% of the company’s assets are investments, … Read More
Section 1202(e) explicitly states that “start-up activities” under Section 195(c)(l)(A) or research/experimental activities under Section 174 or Section 41(b)(4) will receive special treatment when testing for the active test.
Therefore, if an angel investor is investing in a startup company that is pre-revenue and is still in the idea stage, trying to reach product-market fit, the … Read More
Section 1202 states that a ” ‘qualified small business’ means any domestic corporation which is a C corporation” and does not explicitly state treatment for an LLC taxed as a C-Corporation.
Although this is true, in Ltr. Rul. 201636003 a tax-free reorganization involving an LLC taxed as a C Corporation and converted to a … Read More
The general intent of QSBS is to encourage development of companies that are created to drive new innovations and spur job creation, however not every type of C-Corp can qualify for issuing QSBS.
Companies incorporated in the U.S. as C-Corps are eligible for QSBS unless the corporation was formed … Read More
In order to qualify as QSBS, the corporation has to be a C-Corp on the investment date, but not before.
If the business was formed as a different legal structure (e.g. LLC, S Corporation, Partnership), the company can terminate its legal structure to re-incorporate as a C-Corp before … Read More
To become a C-Corp, a company must file Articles of Incorporation with the Secretary of State and file IRS Form SS-4 to obtain an employer identification number (EIN).
A few indications that the Company is likely a C-Corp include:
Name ends with either the identifier “Incorporated” or “Corp”.Business … Read More
Early stage companies find the C-Corp structure appealing because:
C-Corps limit the liability of investors and firm owners. The most an investor can lose if the business were to fail is what they have invested into the business.C-Corps can issue different types of equity instruments such as convertible … Read More
It is possible to challenge / dispute the IRS’s determination regarding the eligibility of your business.
For example, in a ruling letter issued on May 22, 2014, Ruling 201436001, the IRS examined whether a corporation which provides products and services primarily in connection with the pharmaceutical industry, helping to … Read More