QSBS Planning and Savings Potential

Qualified Small Business Stock (QSBS) rollovers are a powerful planning tool that the IRS outlines in Section 1045 of the Internal Revenue Code. Simply owning QSBS-eligible stock for more than 5 years can qualify an investor for up to $10M in gain exclusions when filing federal income taxes after a stock sale. When utilizing the rollover provision for QSBS, however, even gain holders who sold their stock before 5 years, or whose gains exceed the $10M cap may later be eligible to exclude even more of their earnings.

Understanding what amount of gain you can and cannot exclude based on your situation is very important for QSBS planning in general, and for appreciating the benefits of QSBS rollovers in particular.

Below are some common scenarios* related to QSBS planning, exclusion eligibility, and rollovers.

*Note these examples are not complete and make several assumptions about the hypothetical filer’s status and tax liability. Some calculations may be out of date or incorrect.

Simple QSBS:

  • Joe held QSBS Stock for 6 years, and sold with a $12M gain

    • The first $10M of his gain can be excluded under QSBS, while he will owe taxes on $2M

  • Amy held QSBS Stock for 3 years, and sold with a $5M gain

    • Amy does not meet the minimum hold requirement for QSBS gain exclusion (5 years)

  • Peter converted his business to a C-Corp after 5 years, then sold 2 years later

    • He does not qualify for QSBS exclusion, because his time holding QSBS-eligible C-Corp stock was only 2 years

QSBS Planning using rollovers, trusts, etc:

  • Connie has a $35M gain from selling her company stock held for 8 years

    • Connie pre-planned well and moved $6M of the stock to trusts for her three kids pre-sale, took a $10M exclusion on her original QSBS, paid taxes on $5M for liquidity, and made two separate $7M QSBS rollover investments with the remaining $14M, saving 23.8% in taxes (CA filer), or ~$3.33M, on the rollover portion alone.

  • Ivan has a $42M gain from selling his unicorn startup stock held for 3.5 years

    • Ivan is thrilled. He pays taxes on $2M for liquidity now and rolls over the remaining $40M into new QSBS opportunities multiplying his gain exclusion and enabling him to potentially pay zero in taxes on the $40M

  • Mike has a $7M gain from selling his company stock held for 3 years

    • Mike may want to buy a new home and send his kids to school right away, so he pays taxes on $2M and rolls over $5M using 1045, saving a combined 29.55% in taxes (MD filer) after 2 years, or ~$1.47M, on that portion.

  • Ashley received a large distribution from a $1M angel investment (QSBS) that she made 7 years ago. Her gain is $18M.

    • Ashley is able to exclude the first $10M of gain from her initial investment, and she rolls the excess $8M into a new business venture. If Ashley is able to get liquid on her new investment in the future, she can take an additional $10M exclusion, effectively paying $0 in federal tax (and possibly state, depending on where she files) on her entire $18M gain.

QSBS Planning

If some of these examples resonate with you or relate to your situation, it may be useful to have a conversation with our team. Even if a QSBS rollover isn’t right for your gain, we can help connect you with trusted advisors who understand the various planning opportunities related to Qualified Small Business Stock.