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What are the Benefits of Qualified Small Business Stock (QSBS)?
Qualified Small Business Stock (QSBS) entitles owners to exclude 50% to 100% of the gain realized on certain sales. In order to qualify as Qualified Small Business Stock, the stock needs to be issued by a domestic C corporation that does not have more than $50 million of gross assets as of the date the stock was issued and immediately thereafter. The QSBS must be stock acquired at its original issue (not from a secondary market) and must be held more than 5 years by the original owner.
Qualified Small Business Stock: What Qualifies?
QSBS must be issued by a corporation that uses at least 80% of its assets (by value) in an active trade or business (with some exceptionsi). A qualified small business cannot be an investment vehicle or an inactive business.
Non-corporate investors who own QSBS issued after August 10, 1993, and have owned the QSBS for more than five years may exclude all or a portion of the gain they realize on the disposition of the QSBS. The QSBS gain exclusion was enacted to spur investment in certain small businesses by granting a tax incentive for investors when they eventually sell their QSBS.
Also, if QSBS is held by a non-corporate investor for more than six months, that investor may be eligible for a tax-free rollover if he or she sells the QSBS and purchases a different QSBS within sixty days.
The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act)
The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) made several tax breaks permanent, including the QSBS gain exclusion. The new law makes permanent the exclusion of 100% of the gain on the sale or exchange of QSBS acquired after September 27, 2010 and held for more than five years. The PATH Act also permanently extends the rule that eliminates the 100% excluded QSBS gain as a preference item for AMT purposes. In addition, QSBS gain excluded from income is not subject to Net Investment Income Tax of 3.8% from capital gains (and other investment income) on high-income taxpayers.
KROST tax professionals provide consulting services for venture capitalists, entrepreneurs, and small business owners. Our strong technical expertise enables us to address the unique circumstances of our clients. We are highly experienced in the QSBS rules and in identifying opportunities for our clients to take advantage of the QSBS gain exclusion.
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i Non-Qualified Business include certain personal services and other types of businesses, some of which are listed below:
• A service business in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services
• A banking, insurance, financing, leasing, investing, or similar business
• A farming business
• A business involving the production of products for which percentage depletion can be claimed
• A business of operating a hotel, motel, restaurant, or similar business