QSBS & Section 1202 Planning

Begin with the business and the ownership

Our existing business-tax planning materials address starting or buying a business, investing in business stock, and preparing for a future sale. QSBS is one of the specialized topics Ken identifies in his coordinated tax and advisory approach.

The service conversation focuses on the particular business and investment rather than a general promise of a tax-free exit. It brings the ownership question into view alongside your operating plans, personal priorities, and reasons for investing.

Give eligibility questions their own attention

The firm's QSBS materials discuss corporate structure, original-issue stock, the nature of the business, ownership timing, and sale or reinvestment considerations. Those topics provide a starting point for a case-specific review, not a checklist that establishes qualification on its own.

Whether you are evaluating a new investment or considering the future of a business you already own, our role begins with clarifying the facts and the tax questions you need to resolve.

• What business activity and ownership arrangement are being considered?
• How was the stock issued or acquired?
• What does the ownership history show?
• Is the immediate decision an investment, a sale, or a possible reinvestment?

Keep business and personal planning connected

A business sale is also a personal financial decision. Ken's approach brings tax planning, business advisory, and longer-term wealth goals into one relationship. Discussing those goals together can help define which questions deserve attention before a transaction moves ahead.

Tell us about the business, your role, and the decision you are considering. This overview describes the planning service only. It does not confirm that any stock qualifies, calculate an exclusion, or establish the tax treatment of a sale.

Roth 401k ROBS Business

Start or buy a business using your retirement assets.

Become an employee in your own 401(k) owned business, taking a salary as compensation with fringe benefit.

Have the ability to combine ROBS with Factoring to reduce taxable business profits while converting those profits into your 401(k) plan for tax-free income.

Shelter assets from creditors within your 401(k) plan.

Annual business profits need to be taxed as a C Corporation filing form 1120.

Upon the sale of the business, all sales proceeds would be tax-free and available at age 59 1/2.

This is a great program If you want a business or for building tax free retirement savings.

GREAT FOR TAX-FREE RETIREMENT

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Qualified Small Business Stock

Start or buy your own business (not service, financial, R/E or lodging, etc.) or invest In a QSBS.

Become an employee in your own business, taking a salary as compensation with fringe benefit.

After holding the original issued stock six months the stock could be sold and rolled over into another Qualified Small Business Stock.

Must purchase original issue corporate stocks from the business for stock to qualify as QSBS.

Annual business profits need to be taxed as a C Corporation filing form 1120.

Upon sale of the business, all sales profits up to $10 million if held five years or more are tax-free.

This is a great program for currently avoiding tax on the sale of a business at any time.

GREAT FOR TAX-FREE CURRENT INCOME

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Ken Lindow, CPA

BA – Finance
MBA – General Management
Certified Public Accountant

Two-thirds of career as Partner or Owner of CPA Practice, one –third of career in Financial Management, new business venture development, and production operations – including CFO of an Inc. 500 company, ranked 119/500 nationwide Two-thirds of career as Partner or Owner of CPA Practice, one –third of career in Financial Management, new business venture development, and production operations – including CFO of an Inc. 500 company, ranked 119/500 nationwide.

Tax-Free Gain with a Qualified Small Business Stock (QSBS) Company

Structure a business to be eligible for tax-free profits.

A Qualified Small Business Stock plan (QSBS) allows anyone to start or buy a business using either their personal cash investment or by rolling over other types of assets (not retirement funds) as an initial investment to purchase stock in a corporation. Suppose you are a shareholder of small businesses and startups. It is time to see if your stockes are eligible for QSBS tax benefits. QSBS has tax exclusions provided by the U.S government to encourage investment in startups, by nature, are riskier.

Structure The Business Correctly – Sell It Tax-Free

The stock in a QSBS ( Qualified Small Business Stocks ) must be original issue stock within a domestic C Corporation, where the company is typically involved in retail, wholesale, or a technology business. Under section 1202 of the Internal Revenue Code (IRC), a QSBS excludes any business, where the principal asset is the reputation or skill of any one or more of its employees, such as any financial services, farming, healthcare, hospitality industries, law, engineering, architecture, etc. 

Additional Benefits of QSBS

The QSBS benefit of operating under a QSBS is the ability to obtain the buildup of business asset value which can be sold for tax-free profits in the future. Unlike a 401(k)ROBS, there is a maximum amount of assets that can accumulate, which is $50 million. Of those $50 million, 80 percent of those assets must be used in a qualified active business, to conduct the trade of business. Other QSBS exclusions, as outlined in Section 1202 of the U.S. Internal Revenue Code, provide a break on capital gains tax when they sell or exchange qualified stocks of small businesses or startups.

Let’s Talk: (480) 940-8351

Maximum Tax-Free Profits

There is a maximum amount of gain that is allowed to become tax-free. Upon the sale of the business, all sales profits up to the greater $10 million or 10 times the stock basis, will become tax-free and available at any age to the business owner. In order to benefit from the tax- free benefits, the investor has to have a five-year holding period of the stock. Any QSBS is required to be held for six months. If sold after the six months, then you have 60 days to reinvest in another QSBS stock program to avoid any taxation. If you already own a business, it can be converted over to begin the five-year holding period to qualify for the QSBS status.

How To Setup a QSBS

• The corporation must be a C Corporation.

• In the QSBS it is important to note, that any other corporations cannot own the stock in the entity.  The investment is either made through your own personal assets such as a other personal assets rolled over to a QSBS business corporation.

• As an investor, you have the ability to become an employee in your own business, taking a salary as compensation with fringe benefits.

• Programs may acquire and hold property (land), but it is advisable not to hold property within a C Corporation due to double taxation and with the QSBS corporation there are limitations on the amount of assets that are not devoted to business operations.

• All annual business profits will be required to be taxed as a C Corporation in both types of entities.

• Under a C Corporation, if stock is inherited or acquired through a gift, the new owner will step in and continue the five-year holding period requirement from the new original owner in a QSBS.  

Financial Records Needed Before Sale

• Under a QSBS, individuals and corporations need to be able to document the date of acquisition, amount, and stock basis, for all originally issued stock.

• It is important that the company also certify the following:

• Verify that it is a domestic C Corporation.

• Has always had $50 million or less in aggregate gross assets, if property/assets are transferred to the corporation, it must be valued at its Fair Market Value (FMV) at the time of contribution.

• Internally the QSBS business (such as operations, research and experimentation, or investments for future working capital and startup activities) qualified under the QSBS rules.

Does Your Business Qualify As a QSBS?

If all rules and regulations are adhered to a great deal of taxes can be avoided upon the sale of either a QSBS Corporation. With a QSBS Corporation the amount of the gain that can be avoided for taxation is set at $10 million or less.

For further information on whether your business qualifies as a QSBS, contact us to request the QSBS checklist to verify compliance with Internal Revenue Code Section 1202 and 199A.

Let’s Talk: (480) 940-8351