Qualified Small Business Stock (QSBS) is a tax benefit whose purpose is to encourage long term investment in small businesses and startups. Gains on investments that qualify as QSBS can be eligible for reduced or deferred federal tax.
Stock can be considered QSBS if it meets the following requirements:
- Acquired directly from the company
- Held for 5 years before sale (unless rolled over to another QSB)
- Company must be a US C-Corporation during the entire holding period
- The corporation must have $50M or less in assets when the shares are acquired
- The corporation must use 80% or more of its capital in active business pursuits
- There is a list of primary pursuits which disqualify the company (e.g. banking, farming, professional services)
If all the above requirements are met, then depending on the year the stock was acquired, the owner can enjoy a 0% federal income tax rate, with no AMT exposure. This is substantially less than the 23.8% rate that the stock gain would otherwise be subject to.
The taxpayer can only qualify for $10M in gain per company, or 10 times the cost basis, whichever is greater. This limit spans multiple years.
QSB status is available to both founders, investors and employees. The shares do not have to be purchased - they can be acquired as compensation for services, but the holding period only starts once the shares are actually owned, which doesn't apply to unvested shares.
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Bernie J. Pistillo
Recent Changes Make Permanent the 100% Exclusion of Eligible Gain from Sales of Section 1202 “Qualified Small Business Stock”
David B. Strong
Section 1202 - Qualified Small Business Stock
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- StartupA startup company is an entrepreneurial venture in the initial stage of its operations. Startups are typically young businesses aiming to grow quickly and meet a marketplace need by developing or offering an innovative product, process or service.
- Common StockCommon stock is a form of corporate equity ownership, a type of security.
- Preferred StockPreferred stock (also called preferred shares, preference shares or simply preferreds) is a type of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument.
- Income tax in the United States