What Is Qualified Small Business Stock (QSBS)?

Qualified small business stock (QSBS), as defined by the Internal Revenue Code (IRC), refers to shares issued by a qualified small business. A QSB is an active domestic 澳洲幸运5官方开奖结果体彩网:C corporation with gross assets not exceeding $50 million when and immediately a🉐fter the stock is issued. This valuation is based on the original cost of the assets.

Investors and business owners meeting certain criteria can receive significant 澳洲幸运5官方开奖结果体彩网:tax benefits by holding QSB stock, making it an attractive option for those looking to invest in smaller, innovative companies.

Understanding Qualified Small Busin🌳ess Stock (QSBS)

The federal government encourages investment in small businesses under 澳洲幸运5官方开奖结果体彩网:Section 1202 of the Internal Revenue Code (IRC). As noted above, a QSB is any active domestic C corporation whose assets don’t exceed $50 million on or after the issuance of stock.

Only certain types of companies fall under the category of a QSB. Eligible firms typically belong to the technology, retail, wholesale, and manufacturing sectors. Ineligible sectors include hospitality, personal services, 澳洲幸运5官方开奖结果体彩网:financials, farming, and mining.

A qualified small business stock (QSBS) is any stock acquired from a QSB after Aug. 10, 1993. Under Section 1202, 澳洲幸运5官方开奖结果体彩网:capital gains from qualified small businesses are exempt from federal taxes, if the following conditions are met:

• The investor must be an individual, not a 澳洲幸运5官方开奖结果体彩网:corporation.
• The investor must have acquired the stock at its original issue and not on the 澳洲幸运5官方开奖结果体彩网:secondary market.
• The stock must be purchased with cash, property, or as payment for a service.
• The stock must be held for at least five years.
• At least 80% of the issuing corporation’s assets must be used in the operations of one or more of its qualified trades or businesses.

Requirements for QSBS Tax Benefits

𝕴The tax treatment for a QSB stock depends on the acquisition date and the holding period. Section 1202 of the IRC, enacted in 1993, allows noncorporate shareholders to exclude a portion of the gain from selling qualified small business (QSB) stock 🌄held for five years.

• For QSB stock acquired before Feb. 17, 2009, 50% of the gain can be excluded.
• For QSB stock acquired from Feb. 17, 2009, to Sept. 27, 2010, 75% of the gain can be excluded.
• For QSB stock acquired after Sept. 27, 2010, 100% of the gain can be excluded.

In addition, Section 1202 limits the amount of gain tha﷽t can be taken into account annually. The gain is limited to the greater of $10 million or 10 times the adjusted basis of QSB stock sold during the yeౠar, per shareholder and per corporation.

Section 1202 was added to the IRC in 1993 as part of the Revenue Reconciliation Act. It was intended to reward and incentivize taxpayers to invest in small businesses.

Additionally, there are holding requirements for the full exclusion of alternative minimum tax (AMT) and 澳洲幸运5官方开奖结果体彩网:net investment income (NII) tax. 💖The AMT is typically imposed on individuals whose tax exemptions would otherwise allow them to pay disproportionately low taxes for someone at their income level.

The NII tax, meanwhile, is applied to the lower amount of an individual’s NII or the 澳洲幸运5官方开奖结果体彩网:modified adjusted gross incꦕome (MAGI) amount in excess of the predetermined limit. The followinꦕg is a list of how exclusions apply:

• 100% capital gains exclusion: The exclusion of QSBS acquired after Sept. 27, 2010, includes exemptions from AMT and NII tax.
• 75% capital gains exclusion: For QSBS acquired from Feb. 18, 2009, to Sept. 27, 2010. However, 7% of the excluded gain is subject to AMT.
• 50% capital gains exclusion: For QSBS acquired from Aug. 11, 1993, to Feb. 17, 2009. However, 7% of the excluded gain is subject to AMT.

Examples of QSBS Tax Benefits

Consider a taxpayer who files as a single individual with $600,000 in ordinary taxable income. This income places them in the highest tax bracket for 澳洲幸运5官方开奖结果体彩网:capital gains tax (20%). If they sell qualified small business stock acquired onᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ Sept. 30, 2015, and realize a profit of $50,000, they may exclude 100% of their capital gains, resulting in $0 federal tax due on the gains.

No♋w, assume the taxpayer purchased the stock on Feb. 10, 2009, and sold it for a $50,000 profit after five years. The federal tax due on capital gains would be calculated as 20% of 50% of $50,000, equating to $5,000.

澳洲幸运5官方开奖结果体彩网:Stockholders who want to sell qualified small business stock (QSBS) not held for the minimum five-year period can still benefit. Section 1045 of the IRC allows them to defer the gain by reinvesting the proceeds from the sale of QSBS into another QSBS within 60 days.

Types of QSBS

Qualified startups and existing businesses wanting to expand their operations may raise initial or additional capital through a qualified small business stock (QSB🗹S) offering.

These companies can also use qualified small business stock (QSBS) as a form of 澳洲幸运5官方开奖结果体彩网:in-kind payment, frequently used to compensate employees for their services when 澳洲幸运5官方开奖结果体彩网:cash flow is minimal. Qualified small business stock (QSBS) might also be used to retain employees and as an incentive to help the company grow and succeed.

The Bottom Line

Qualified small business stock (QSBS) offers significant tax ಌadvantages, making it an attractive option for those investing in small, innovative companies. Key benefits include the potential to exclude up to 100% of capital gains from federal tax🉐es if the stock is held for at least five years, depending on when it was acquired.

To fully benefit, investors must meet specific criteria, such as acquiring the stock at its orig൩inal issue and holding it for the required period. Overall, QSBS can be a powerful tool for reducing tax burdens while supporting the growth and success of small businesses.