QSBS Attestation Explained: Do You Really Need It?

 

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What Is QSBS Attestation?

QSBS attestation is a tool investors can use to confirm a stock’s eligibility for QSBS tax benefits. Think of it as a third-party validation that a company and its stock meet the specific requirements of Section 1202 of the Internal Revenue Code. While not legally required, attestation can help avoid errors when claiming the exemption and provide clear documentation in case of an audit. 

Here’s a quick summary of what it covers:

  • Company eligibility: The company is a C-Corp with gross assets of $50 million or less at the time the stock was issued.
  • Stock issuance: The stock’s issue date helps determine how much of the capital gains can be excluded. QSBS attestation will also certify that the stock was issued directly by the company.
  • Business activity: At least 80% of the company’s assets must be actively engaged in a qualified trade or business. The attestation also flags any activities outside the definition of a “qualified” trade or business.

When Is QSBS Attestation Worth Considering?

QSBS attestation helps guarantee that stock will be eligible to be treated as QSBS by memorializing certain corporate actions / events during the period in which they happen. This protects against tripwires that can endanger eligibility.

Here are a few scenarios where QSBS attestation can be especially valuable:

  • Attract investors seeking tax-efficient investments: Investors aiming to maximize QSBS benefits often want confirmation of eligibility before committing to a purchase.
  • Simplify liquidity events: During mergers, acquisitions, or other liquidity events, an acquiring party may require formal proof of QSBS qualification.
  • Satisfy ongoing requirements: Over the course of a shareholder’s holding period, the company must continue to meet the 80% active business requirement and stay within specific asset thresholds. QSBS attestation helps establish a baseline, making tracking eligibility much easier.

Who Benefits from QSBS Attestation?

QSBS attestation offers meaningful advantages for those with long-term goals, including:

  • Founders: Proving that company stock qualifies for QSBS benefits can be a powerful tool for attracting and retaining the best and brightest talent. Employees gain confidence in knowing their potential gains from the sale of QSBS stock could be entirely tax-free. 
  • Early-stage investors: Individuals investing in small, fast-growing C-Corporations can take full advantage of the significant tax savings offered by QSBS stock.
  • Venture capital and angel investors: QSBS attestation streamlines the due diligence process for early-stage deals.

Is QSBS Attestation Right for Your Situation?

Waiting until exit to certify could be too late, especially if potentially disqualifying actions, like stock repurchases, have occurred. Addressing QSBS eligibility early helps ensure you secure the full benefits.

Additionally, QSBS can result in millions of dollars in tax savings on a large enough gain, so the cost of attestation is often negligible when compared to the potential benefit. 

To learn more about QSBS attestation, how it helps maximize capital gains tax benefits, and ways to stay updated on the latest tax laws, contact our team today.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

Andrea Morhardt

About Andrea Morhardt

Andrea Morhardt is a certified public accountant with extensive experience demystifying complicated tax and accounting concepts. Drawing from Big Four consulting experience, Andrea helps mid-size accounting firms and entrepreneurs deliver easy-to-understand information to investors, employees, and other stakeholders.