- Banyan
- Posts
- What You Need To Know Qualified Small Business Stock (QSBS)
What You Need To Know Qualified Small Business Stock (QSBS)
Banyan Founder and Investor Guide Series
Sam Awrabi
September 17, 2023
What is QSBS and why should you care?
QSBS stands for “qualified small business stock.” It refers to a section of the United States tax code that provides a tax benefit upon the sale of company shares that meet certain criteria. The QSBS rule allows some owners of startup equity to eliminate 100% of their federal income and state income tax on the greater of their first $10m of gains per asset or 10x the cost basis of an asset!
How does QSBS help?
If the shares and the company issuing the shares meet the criteria for “good QSBS,” and the shares are held for more than five years, then the holder of the shares can exclude the payment of otherwise taxable federal capital gains from the sale of those shares up to a cap equal to the greater of (i) $10 million, and (ii) 10 times the holder’s aggregate basis in the shares. At the federal level (exclusive of state tax savings), QSBS savings equate to a 23.8 percent tax savings on the eligible amount.
What companies qualify for QSBS treatment?
The main criteria are:
The company must be a U.S. C corporation (LLCs and S corporations are not eligible) engaged in an active business, other than certain excluded lines of business (banking, hotels and restaurants, insurance, professional services and others).
The shares must be acquired directly from the company at original issuance (shares purchased from another shareholder are not eligible).
The company must have $50 million or less of gross assets immediately after the issuance of the shares.
The holder cannot be a corporation.
The shares must be issued for cash, services or other property.
QSBS is only available for actual shares. Other investments such as unexercised stock options do not qualify.
Are founders’ shares always QSBS?
Not necessarily. To qualify for QSBS treatment, the shares must be purchased directly from the company. Shares purchased in a secondary transaction such as this will not qualify for QSBS treatment.
