Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
What Every Entrepreneur Needs to Know About Qualified Small Business Stock
Published Date : April 26, 2016
Since 1993, the federal government has incentivized investment in small businesses through favorable tax treatment in order to keep the economic engine running. Those efforts have proven successful, as small businesses created nearly two million of the roughly three million private-sector jobs generated in 2014 and more than seven million of the 11 million jobs created during the economic recovery have been generated by startups and small enterprises.1 For entrepreneurs and investors in startups, further incentives can be found in the Protecting Americans from Tax Hikes (PATH) Act of 2015, that when signed by President Obama made certain and significant tax incentives permanent.2
The new law makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business stock (QSBS) acquired after September 27, 2010 and held for more than 5 years by individual tax payers, subject to certain limitations discussed below. The Act also permanently extends the elimination of QSBS gain as a preference item for Alternative Minimum Tax (AMT).
To Qualify as QSBS:
The stock must be in a domestic C corporation (not an S corporation or LLC, etc.), and it must be a C corporation during substantially the entire holding period.
The corporation may not have more than $50 million in assets as of the date the stock was issued and immediately after.
Your stock may not have been acquired from a secondary market offering, but instead must be an original issuance.
During the holding period, at least 80% of the value of the corporation’s assets must be used in the active conduct of one or more qualified businesses.
Most early-stage investments in C corporation technology companies meet these requirements.
If you’ve held stock qualifying as QSBS for at least five years when it’s sold, all of your gain may be excluded from federal tax. The maximum gain eligible for exclusion on any one private investment is the greater of $10 million or 10 times the taxpayer’s adjusted basis in the stock. If your gain exceeds that, the remainder is taxed at a Federal tax rate of 28%. This assumes you are in the 15% or 20% bracket for long-term capital gains.
Keeping good records will ease the burden when it comes time to report a stock sale. In your records you should include the date of the original purchase, the amount paid, a copy of the account statement showing the transaction, and a copy of the original share certificate. If you think your founder equity award may qualify as QSBS, ask the company to certify to the qualifications listed above.
The five year holding period is a critical detail. Keep track of the date when your investment reaches the five-year holding period. Selling right before the five year holding period mark would disqualify this significant tax break.
Lastly, it’s important to review the details of your equity holdings with your accountant and wealth advisor to determine if you can take advantage of this meaningful tax benefit.
With this incentive, the US government has permanently thanked entrepreneurs for their impact on our country’s growth, innovation and employment – so be sure to say ‘you’re welcome’ by seizing the opportunity.
1https://www.sba.gov/blogs/small-businesses-create-2-million-jobs
2http://waysandmeans.house.gov/wp-content/uploads/2015/12/SECTION-BY-SECTION-SUMMARY-OF-THE-PROPOSED-PATH-ACT.pdf
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
Video Presentations
All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
Recent Posts
