Squares

Fundraising, Start Ups

Unlocking the Benefits of Qualified Small Business Stock (QSBS)

By Dan Eyman

Investing in small businesses offers significant growth potential and, with the right knowledge, substantial tax benefits. One such tax advantage comes from Qualified Small Business Stock (QSBS). For investors, understanding QSBS can lead to considerable tax savings, making it an attractive option for those investing in eligible startups. This guide will delve into the intricacies of QSBS, including its benefits, eligibility criteria, and how we can assist with QSBS attestation letters to ensure compliance with IRS regulations.

What is Qualified Small Business Stock (QSBS)?

Qualified Small Business Stock (QSBS) refers to shares in a qualified small business that meet specific IRS requirements, offering significant tax benefits to investors. Under Section 1202 of the Internal Revenue Code, gains from the sale of QSBS can be partially or entirely excluded from federal income tax, depending on how long the investor holds the stock and other criteria.

Benefits of QSBS for Investors

The primary benefit of QSBS is the potential for significant tax savings. Here are the key advantages:

1. Capital Gains Exclusion

Investors can exclude up to 100% of the gains from the sale of QSBS held for more than five years. The exclusion amount is subject to certain limitations, typically the greater of $10 million or 10 times the investor’s adjusted basis in the stock.

2. Encouragement of Long-Term Investment

The five-year holding requirement encourages long-term investment in small businesses, which can contribute to their growth and stability.

3. Attractive for Startups

The potential tax benefits make QSBS an attractive option for both investors and startups looking to raise capital.

Eligibility Criteria for QSBS

To qualify as QSBS, both the issuing company and the investor must meet specific criteria set by the IRS:

Issuing Company Requirements

  1. Domestic Corporation: The stock must be issued by a U.S. domestic C corporation.
  2. Active Business: At least 80% of the company’s assets must be used in the active conduct of a qualified trade or business.
  3. Gross Assets: The company’s gross assets must not exceed $50 million at the time of stock issuance and immediately thereafter.
  4. Original Issuance: The stock must be acquired by the investor at its original issue (not from a secondary market).

Investor Requirements

  1. Holding Period: The investor must hold the stock for more than five years to qualify for the maximum exclusion.
  2. Acquisition Date: The stock must have been acquired after September 27, 2010, to qualify for the 100% exclusion.

How We Help with QSBS Attestation Letters

To ensure compliance with IRS requirements and to substantiate QSBS status, investors often need a QSBS attestation letter. We provide QSBS attestation letters, which serve as official documentation confirming that the stock meets the necessary criteria. Here’s how we assist:

Detailed Verification

Our team conducts a thorough review of the issuing company’s financials and operations to verify eligibility for QSBS status.

Accurate Documentation

We prepare accurate and detailed attestation letters that outline the compliance with QSBS requirements, providing investors with the necessary documentation for tax reporting.

Ongoing Support

We offer ongoing support and consultation to both investors and issuing companies to maintain QSBS eligibility and navigate any changes in IRS regulations.

Conclusion

Qualified Small Business Stock (QSBS) presents a valuable opportunity for investors seeking to maximize their returns through tax advantages. By understanding the benefits and eligibility criteria, investors can make informed decisions and support the growth of promising small businesses. Additionally, our QSBS attestation letters ensure compliance and provide peace of mind for investors aiming to capitalize on this beneficial tax provision.

For those ready to explore the potential of QSBS, we’re here to help. Our expert team provides comprehensive QSBS attestation services to verify eligibility and support your investment strategy. Reach out to us today to learn more about how QSBS can benefit your portfolio and how we can assist with the necessary documentation.