Is QSBS “Attestation as a Service” Really Necessary?
Qualified Small Business Stock (QSBS) attestation refers to documentation that supports a shareholder's claim that their shares may qualify for favorable tax treatment under Section 1202 of the Internal Revenue Code. As we know, QSBS can provide exclusions of up to 100% of the capital gains tax on gains from the sale of eligible small business stock (subject to certain conditions), so getting your ducks in a row before tax-filing time comes around is very important.
Several companies are now offering “QSBS attestation as a service”, but do these attestation documents/letters really mean anything? And should you ever pay for attestation from one of these providers?
What is QSBS attestation?
A QSBS attestation letter is a semi-formal document intended to confirm that a stockholder’s shares may qualify for QSBS treatment. These letters aim to establish a level of defensibility in case of an IRS audit. However, they don’t require specific credentials to draft—anyone, from a company officer to an external advisor, can write one.
The company’s potential qualification as a "qualified small business" under Section 1202 during the relevant time.
Details about the issuance of stock, including dates and compliance with requirements (e.g., stock issued directly by the company, not purchased from another shareholder).
Any other pertinent factors, such as the company’s gross assets staying below $50 million at issuance and the nature of its business activities qualifying under QSBS rules.
Are QSBS attestation documents useful?
If the IRS were to select and audit a return where QSBS exemptions were claimed, attestation letters would be one piece of evidence that the IRS could use to help determine two main points of contention:
Did the filer make a good-faith effort to validate the legitimacy of their QSBS claim, or did they just write in an exclusion without due diligence or record keeping?
Are the facts of this particular case strong and consistent in favor of QSBS defensibility?
The first point here will largely determine whether or not the filer will be subject to additional penalties and fees as a result of the filing (if the QSBS exemption is determined to be invalid).
The second point is the whole purpose of the audit: to review the available facts and determine if what was claimed as QSBS-eligible, actually was. An attestation letter stating that the stock “should” be QSBS eligible holds little to no weight in the latter consideration - the relevant facts will ultimately be determined and checked by the auditor.
The former, however, regarding questions about the filer’s intent, can be bolstered with an attestation letter and other backing documentation in hand. Records that demonstrate that the shareholder took reasonable lengths to ensure their claim for an exemption was valid may save them from substantial penalties if the audit doesn’t go their way.
Big Picture
Don’t be fooled into thinking that QSBS attestion is a means of “confirming” QSBS eligibilty, as some platforms may suggest. Remember, the IRS will have the final say, regardless of who wrote your attestation, how much work you did to prove eligibilty, or what legal counsel you acquired (same with most any multi-factor tax exemption).
These services “confirming” eligibility are especially common to see coming from cap table management platforms providing attestation as a service. Sure, your cap table manager has insight into the issuance and redemption of shares, along with dates, values, and maybe company gross asset values etc., but there are many things that these third party platforms can’t necessarily check for - like active conduct and active trade/business requirements, cash management, and tertiary business activities. All of this has a bearing on QSBS eligibility, not simply “what stock was issued and when?”.
Attestation as a Service
Be wary of “attestation as a service”. Your best bet is to be in regular talks with a tax or legal advisor who has advanced understanding of QSBS, and of the nature of your business, from your balance sheet, to your cap table, to your day to day activities. Automated attestation can be a helpful flag for shareholders to take additional exploratory steps, but they will never confirm eligibility, one way or another.
We do often suggest that our partners seek out legal counsel who can write a “more likely than not” opinion on the QSBS eligibility of shares if a meaningful amount of stock is being claimed as QSBS, or if that shareholder is planning to do a QSBS rollover. While the benefits of a good QSBS opinion are similar to that of attestation, the process for securing one of these letters typically involves a more in-depth diligence and discovery process than these automated attestation services.
If you have questions about attestation, tax/legal opinions, or QSBS eligibility, connect with our team.
