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QSBS Tax Savings - How does it work?

QSBS Tax Savings - How does it work?

July 28, 2022

Death and taxes are inevitable, right? Well, if you have heard about the qualified small business stock (QSBS) exclusion, you might think differently. But do you know how to take advantage of this tax saving opportunity?

QSBS allows shareholders of certain qualified stocks to remove a large portion of capital gains from their tax calculation when selling or exchanging the specified stock. Depending on when the stock has been purchased or how long it has been held, this exclusion can eliminate up to 100% of the capital gains tax. Because of this tax exclusion, you can sell and exchange the qualified stocks with absolutely zero tax deductions. So, maybe taxes are not as inevitable as you previously thought.

Both the investor and the company must meet certain qualifications for the investor to be eligible for the tax deduction.

Firstly, you must invest in a qualified business. To be considered for QSBS status, the stock issuer must be an active domestic C-Corp, the issuer’s assets must not surpass $50 million, both before and after the stock issuance. The issuer’s business must not involve prohibited industries; approved industries generally include technology, wholesale, retail, or manufacturing companies. Lastly, the issuer must issue the stock directly.

Secondly, investors must meet the shareholder criteria to gain tax benefits. An investor must be an individual, trust, or pass-through entity, meaning that corporations are do not qualify for QSBS tax deductions. The shareholder must hold the stock for a period five years to obtain capital gains exclusion. Additionally, a maximum gain cap of ten times the original asset value of the investment limits the capital gain exclusion.

The QSBS tax exclusion motivates shareholders to invest in the smaller companies that they helped build. The ability to offer such significant tax incentives helps smaller qualifying corporations to attract investors as well retaining talent through the leveraging of stock for employee benefits. QSBS encourages individual investors to become long-term shareholders, for they are only able to exercise their tax deduction after a five-year holding time. The QSBS tax exclusion benefits both startup ventures and individual investors, so unless you like paying taxes, you should learn to take advantage of the QSBS tax exclusion today.

 

https://carta.com/blog/qsbs/

https://www.nerdwallet.com/article/investing/qualified-small-business-stock-qsbs

https://www.investopedia.com/terms/q/qsbs-qualified-small-business-stock.asp#:~:text=Qualified%20small%20business%20stock%20(QSBS)%20refers%20to%20shares%20of%20a,immediately%20after%20its%20stock%20issuance

https://www.sba.gov/blog/qualified-small-business-stock-what-it-how-use-it

https://www.fiduciarytrust.com/article-pages/trust-estate--tax-planning/how-to-take-advantage-of-the-qualified-small-business-stock-exclusion