A Quick QSBS FAQ
What is QSBS?
QSBS, or Qualified Small Business Stock, is a special type of stock issued by a qualified small business that meets specific requirements under IRC § 1202. It provides favorable tax treatment, allowing investors to exclude up to 100% of the gain on the sale of the stock from federal income tax.
What types of businesses can issue QSBS?
Only C corporations can issue QSBS. The corporation must be a qualified small business, meaning it must meet the criteria specified in IRC § 1202, including an active business requirement, limitations on the corporation's gross assets, and more.
What are the gross asset requirements for a corporation to issue QSBS?
The corporation's aggregate gross assets must not exceed $50M at any time before the issuance of the QSBS. Aggregate gross assets include cash and the adjusted bases of other property.
What is the active business requirement for QSBS qualification?
At least 80% of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses during substantially all of the taxpayer’s holding period of the stock.
What types of businesses are excluded from being a qualified trade or business for QSBS purposes?
Excluded businesses include those involved in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking, insurance, financing, leasing, investing, farming, mining, and hospitality services such as running hotels or restaurants.
How must QSBS be acquired to qualify for tax benefits?
QSBS must be acquired directly from the issuing corporation in exchange for money, other property (excluding stock), or services. Stock acquired through the secondary market does not qualify.
What is the required holding period for QSBS to benefit from the tax exclusion?
The QSBS must be held for more than five years to qualify for the tax exclusion under IRC § 1202. This holding period requirement begins on the date the stock is issued.
Are there any limitations on the amount of gain that can be excluded under IRC § 1202?
Yes, the exclusion is limited to the greater of $10M in gain from a single issuer or 10 times the aggregate adjusted basis of QSBS disposed of by the taxpayer during the taxable year.
What are the consequences of stock redemptions on QSBS qualification?
Stock cannot qualify as QSBS if the corporation has redeemed more than 5% in value of any of its stock within a two-year period beginning one year before the issuance of the QSBS. Specific exceptions apply for certain redemptions, such as those related to death, disability, or divorce of the stockholder.
Can gains from QSBS be rolled over to other QSBS?
Yes, under IRC § 1045, gains from the sale of QSBS held for more than six months can be rolled over into other QSBS within 60 days, deferring the recognition of gain.
