Security Level Details Securities are stock equity (i.e. common or preferred shares):
Generally, other security types (i.e. stock options, convertible notes, warrants, etc.) which may become stock in the future need to convert to stock before the QSBS holding period starts. Certain SAFE securities may be QSBS eligible, but the details would need to be examined closer.
Securities were obtained directly from the company (i.e. originally issued):
Stock obtained from previous shareholders (i.e. secondary purchases) generally would not be QSBS eligible.
Stock was held for at least 5 years:
While stock needs to have been held for at least 5-years in order to obtain the QSBS tax exclusion, QSBS gains from stock sold in under 5-years can be rolled into other QSBS stock with the holding period tacking onto the previous stock (see IRC Section 1045). Rollovers needs to be completed within 60 days of the realized gain.
Corporate Level Eligibility Requirements The company has indicated that the corporate level eligibility criteria were met:
The shareholder may have the right to obtain a QSBS analysis from the corporation. If the shares are subject to an Investors Rights’ Agreement, it is best to see if there is a clause regarding requesting a QSBS analysis. If not, we can help you request an analysis from the corporation and/or help prepare one.
Certain corporate level eligibility requirements need to be validated by the corporation, so having an indication from the company is great. Because certain elements need to have been met during the holder’s holding period it is often the case that the indication from the corporation only covers a portion of the holding period. We can help you assess if further validation is warranted.
The company is taxed as a C-corporation:
In order to qualify as QSBS, stock needs to have been issued by a C-corporation.
The company is based in the United States:
In order to qualify as QSBS, the company needs to be a domestic US corporation (i.e. substantially all operations / assets need to be in the United States).
The company is in the business of producing something (i.e. generally companies that produce tangible goods or software qualify, however please keep in mind this is a generalization of the rules and further details would have to be known to help assess if the company is in a Qualified Trade or Business):
IRC Section 1202 defines qualifying trades or businesses in the negative, indicating the types of businesses and industries that do not qualify to issue QSBS stock. Refer
for further details.
Stock was issued when the company had less than $50M in gross assets:
In order to qualify as QSBS, the stock needs to have been issued when the company had less than $50M in aggregate gross assets. This generally refers to the tax basis of assets, however assets contributed to the corporation are included at the fair value of the assets when contributed.
The company does not hold significant real estate or portfolio securities:
In order to qualify as QSBS, the company needs to satisfy the Active Business Requirements for substantially all of the shareholder’s holding period. During periods in which greater than 10% of the company’s assets are comprised of real estate not used in the active conduct of the business and/or portfolio securities, the company will not satisfy the Active Business Requirements.
The company has repurchased significant amounts of stock from shareholders since the company was founded:
In order to qualify as QSBS, the company must not have redeemed significant amounts of stock from shareholders within the period 1-year before and 1-year after the issuance. Additional rules apply for redemptions from the specific shareholder.
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