As a business owner, understanding the basics of qualified small business stock (QSBS) can be a crucial tool in making sure that you understand the tax consequences of your investment decisions. QSBS is stock issued by a qualified small business, and it entitles investors to certain tax benefits.
How Does Qualified Small Business Stock Work?
Under the Internal Revenue Code, qualified small businesses are defined as S corporations that have gross assets of $50 million (or less) both before and immediately after the issuance of the stock. Qualified small business stock allows investors to exclude up to 100% of capital gains from their taxable income when the stock is held for more than five years. This allows investors to avoid what would normally be an expensive capital gains tax.
What Are the Limitations of Qualified Small Business Stock?
Although the benefits of qualified small business stock are attractive, there are some limitations to be aware of. For example, the stock must be issued after August 10, 1993 and must be held for at least five years for investors to be eligible for the full tax exclusion.
Additionally, in order to be eligible for qualified small business stock, the company issuing the stock must be a C corporation and must not be engaged in the trade or business of certain industries such as banking, health insurance, and other prohibited activities.
Conclusion
Qualified small business stock can be a great way to defer capital gains taxes, however it is important to understand all of the requirements and limitations before investing. Remember to look into the company you are investing in and make sure it meets all the criteria for qualified small business stock under the Internal Revenue Code.