Tax Benefits of QSBSNormally, when an asset that has been held for more than one year is sold it is subject to long term capital gains rates of up to 20 percent. Section 1202 allows for an exclusion per taxpayer and per corporation the greater of:
- 10 times the aggregate adjusted basis in the qualifying small business
QSBS RequirementsTo utilize the QSBS exclusion, a business must meet a number of requirements to qualify:
- Must be an active domestic C-Corp
- Assets must be below $50 million
- Business must not be involved in a prohibited industry
- Stock must be issued directly from the issuer (no secondary market purchases)
- Perform services related to health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, finance, banking, insurance, leasing, investing, or brokerage
- Rely on an employee or owner’s reputation
- Produce products for which a depletion can be claimed (e.g. fossil fuels)
- Operate a hotel, motel, restaurant, or similar business
- Are a farming business
- You cannot be a corporation. Individuals, trusts, and pass-through entities can benefit from QSBS treatment.
- You must hold the stock for over five years. There is an exception to this rule if you held the stock for at least 6 months and proceeds are reinvested into another QSBS within 60 days.