Which assets count towards the QSBS Active Business Requirement?

“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, cash minus cash for working capital needs, non-operating real estate, and non-operating assets than the company will not qualify.
The Company can not have more than 10% of its assets allocated to (i) real property that is not used within operations and/or (ii) portfolio stock or securities in third-party corporations with less than 50% ownership. If the securities are considered a controlling value, 50% or greater ownership, the securities will not be considered in the 10% test (Section 1202(e)(5) & (7)).
There is a special consideration for assets that are being held to finance research and experimentation or in-house research activities (Section 1202(e)(6). Also, special consideration for assets being held for future investments or increases in working capital that are planned to be used within two years (Section 1202(e)(6). If the corporation has been in business for two years it must use at least 50% of the assets held for investments or research activities.
Another special consideration includes rights to computer software that receive royalties, falling within the meaning of section 543(1)(D). That software will be considered an active trade or business asset.
A specialized small business investment company (SBICs) operating under section 301(d) of the Small Business Investment Act of 1958 will be considered an active trade or business. An SBIC is an alternative to venture capital as a source of capital for startups. Generally, QSBS investments are not through an SBIC.

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QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.