Founders, Please Take Advantage of Qualified Small Business Stock (QSBS)!
Founders and early employees of companies are often granted equity that can meet the rules for Qualified Small Business Stock (QSBS). QSBS treatment can provide significant tax benefits by excluding or reducing capital gains taxes when the stock is sold.
The tax exemption allows savings up to the greater of $10 million or 10x the shareholder's basis. There's a lot to consider when utilizing potential QSBS exclusions. Awareness and early planning are key here!
Criteria for QSBS Eligible Stock:
The company must be a domestic C-Corporation, must have had less than $50 million in gross assets at the time the stock was issued, and must be an active business. Additionally, you must hold the stock for a minimum of 5 years before the sale.
QSBS is a Federal tax exemption, but states differ on how they conform to the Federal rules. Some states fully conform, some partially, and some don't conform at all. Many are surprised to learn that California income taxes still apply in QSBS transactions, especially as California has high tax rates.
It's recommended to work with a professional to analyze potential QSBS opportunities and guide you toward taking the necessary steps to assure the positions qualify.