Qualifying for QSBS Status: Founders, Don’t Miss Out on Massive Potential Tax Savings
Are you a founder, early employee or investor in a startup? If so, you may be eligible for significant tax benefits if your stock meets the requirements for Qualified Small Business Stock (QSBS). QSBS status can lead to substantial tax savings when you sell your shares, making it an attractive option for those involved in startups. We'll briefly explore what QSBS status is and the steps you can take to qualify for it.
What is QSBS Status?
Qualified Small Business Stock (QSBS) status is a tax incentive provided by the IRS to promote investment in small businesses. Under Section 1202 of the Internal Revenue Code, individuals who meet specific criteria can exclude capital gains from the sale of QSBS from federal income tax. That’s right, you could potentially have zero capital gains tax if you qualify. It’s not uncommon to see founders, early employees, and investors save millions of dollars in taxes when they take advantage of QSBS status.
Significant Tax Benefits
Exclusion of Gain: Depending on when you acquired the stock, you may be able to exclude 100% of your federal capital gains from taxation. Depending on your location, you may also be able to exclude your state taxes.
How to Qualify for QSBS Status
To qualify for QSBS status and enjoy the associated tax benefits, you must meet specific criteria:
Ownership of a Qualifying Small Business: The company must be a domestic C corporation and meet certain active business requirements. It should have aggregate gross assets of $50 million or less at the time you acquire the stock.
Hold the Stock for Five Years: To maximize the tax benefits, you must hold the QSBS for at least five years.
Must be an active business: The corporation issuing the QSBS must satisfy the “active business requirement” of IRC Section 1202. This means at least 80% of the corporation's assets must be used in “active conduct of one or more qualified trades or businesses.” A great financial planner and/or CPA can determine if you meet this requirement.
Must not be an excluded business type: Many service related businesses are excluded from QSBS treatment. Many farming, hotel, motel, and fossil fuel related businesses are also excluded.. Consult your tax professional to make sure your business qualifies.
Document Everything
Keep thorough records of your investment to be compliant with the QSBS rules. Proper documentation is essential if you ever face an IRS audit.
Get Help
Tax laws can be complex, and the IRS's rules for QSBS status are no exception. Seek the guidance of a qualified tax professional and financial planner, such as Citrine Capital, to ensure you meet all the requirements to maximize your tax benefits. With potential tax savings this significant, you want to assure you don’t mess up your QSBS status!
In Conclusion
With careful planning and adherence to the requirements, QSBS status can provide massive savings on taxes for founders and private stock investors. By holding stock in eligible small businesses for the required duration, and meeting the other requirements, you can potentially enjoy significant tax savings. However, navigating the complexities of QSBS status can be challenging, so it's essential to seek professional advice to ensure compliance with IRS rules. At Citrine Capital we’re experienced in helping clients comply with IRS guidelines to maximize the benefits of their Qualified Small Business Stock.