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Qualified Small Business Stock (QSBS) for a Tax-Free Gain
Structure a business to be eligible for tax-free profits.
A Qualified Small Business Stock (QSBS) allows anyone to start or buy a business using either a personal cash investment or by rolling over other types of assets (not retirement funds) as initial investment to purchase stock. A QSBS is classified as 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.
The 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. Furthermore, 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 for the QSBS.
General Components in Both Programs Under a C Corporation
Financial Records Needed
It is important that the company also certify the following:
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 refer to the QSBS Checklist in compliance with Internal Revenue Code Section 1202.