QUALIFIED SMALL BUSINESS STOCK

QUALIFIED SMALL BUSINESS STOCK

Small business stock refers to shares in a corporation that qualifies as a small business under specific regulatory criteria. Under Section 1202 of the Internal Revenue Code, Qualified Small Business Stock (QSBS), provides significant tax advantages for investors if certain requirements are met. Below are the main features and criteria:

1. Tax Benefits

• Investors who hold QSBS for more than five years can exclude up to 100% of the gain from federal capital gains tax when selling the stock, subject to certain limits.
• The exclusion percentage depends on when the stock was acquired.

2. Eligibility Requirements for the Business

• The business must be a domestic C-corporation.
• The gross assets must not exceed $50 million at the time the stock is issued.
• At least 80% of its assets must be actively used in a qualified trade or business (generally excludes professional services, financial institutions, farming, or hospitality).

3. Stock Issuance

• The stock must be acquired directly from the corporation, not from another investor.

4. Holding Period

• To qualify for tax benefits, the stock must be held for at least five years.

5. Exclusion Limits

• There is a cap on the amount of gain that can be excluded, typically the greater of $10 million or 10 times the investor’s basis in the stock.

Angel investors and venture capitalists often seek QSBS with high growth potential.