Home > QSBS Qualification QSBS Qualification Step 1 of 8 12% Please provide some background information on yourself and the company to help get the analysis started.What is the company’s official (i.e. legal entity) name?(Required) What is the company website?(Required) What is your relationship to the company?(Required)FounderInvestorEmployeeFormer EmployeePlease provide a one-sentence description of the company’s business.(Required) What is your name?(Required) First Last What is your email address?(Required) QSBS can result in $2.38M saved for every $10M in capital gains. There are various requirements for an entity to qualify, including: (1) Entity needs to be a C-Corp or taxed as a C-Corp (2) Certain trades and business do not qualify (especially entities where the ‘principal asset is the reputation or skill of one or more of its employees’. (3) Gross Assets were less than $50 million when the shares were issued. (4) The company demonstrates that it applied substantially all of its assets towards the qualified trade or business. (5) Certain corporate actions such as share repurchases can some or all of the entity’s shares from qualifying as QSBS. QSBS Qualifying Criteria: Entity TypeWhat year was the company incorporated?(Required)Before August 10, 1993Remainder of 19931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018201920202021What state is the company incorporated in?(Required)Please select stateAlabamaAlaskaArizonaArkansasCaliforniaColoradoConnecticutDelawareDistrict of ColumbiaFloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippiMissouriMontanaNebraskaNevadaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregonPennsylvaniaRhode IslandSouth CarolinaSouth DakotaTennesseeTexasUtahVermontVirginiaWashingtonWest VirginiaWisconsinWyomingArmed Forces AmericasArmed Forces EuropeArmed Forces PacificHas the company engaged in any mergers or acquisitions to date?(Required) Yes No Please provide some brief information about the any mergers or aquisitions.(Required) What is the company’s primary location (ie. headquarters) address?(Required) Street Address City AlabamaAlaskaAmerican SamoaArizonaArkansasCaliforniaColoradoConnecticutDelawareDistrict of ColumbiaFloridaGeorgiaGuamHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippiMissouriMontanaNebraskaNevadaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaNorthern Mariana IslandsOhioOklahomaOregonPennsylvaniaPuerto RicoRhode IslandSouth CarolinaSouth DakotaTennesseeTexasUtahU.S. Virgin IslandsVermontVirginiaWashingtonWest VirginiaWisconsinWyomingArmed Forces AmericasArmed Forces EuropeArmed Forces Pacific State ZIP Code Please identify the legal entity structure of the company.(Required) C-Corp S-Corp LLC (taxed as a partnership) LLC (taxed as a C-Corp) I'm not sure. Has the company always been this entity type?(Required)YesNoTIP ❖ To be considered a Qualified Small Business, the company must be a domestic C-Corporation or a domestic entity taxed as a C-Corporation. . ❖ If an entity starts as an entity other than a domestic C-Corporation and later converts to a C-corporation, the 5-year holding period would generally not start until the C-corp securities are issued. ❖ If the entity converted to a C-Corp, there could be a step-up in tax basis of securities at the time of conversion, which could ultimately increase the eligible exemption amount (i.e. $10M or 10x each taxpayer’s basis). IRC Section 1202(c)(1) QSBS Qualifying Criteria: Qualified Trade or BusinessWould you consider the core business to involve the “performance of services where the principal asset is the reputation or skill of one or more employees”?(Required)Please select oneYesNoNot SureAdditionally, certain fields are excluded from eligibility as QSBS. Please indicate below if you would consider the company’s business activities to involve performance of services in the fields of(Required) Health Law Engineering Architecture Accounting Actuarial Science Performing Arts Consulting Athletics Financial Services Brokerage Services Banking, insurance, financing, leasing, investor or similar business Farming Production or extraction of products (eg. mining) Operating a hotel, motel or similar business None of the above TIP ❖ The intent of Section 1202 and the QSBS tax exemption is to incentivize investment in entrepreneurship and innovative companies in order to drive future economic growth. In order to be considered a Qualified Small Business (QSB), the Company must be active in a qualified trade. ❖ In general, QSBs are scalable type businesses that have the potential to spur economic growth. IRC Section 1202(e)(3) defines qualifying businesses in the negative, excluding certain industries and companies where “the principal asset of the business is the reputation or skill of one or more of its employees”. IRC Section 1202(e)(3) QSBS Qualifying Criteria: SizeWhat is the company’s approximate current gross asset level (i.e. total assets on your balance sheet)?(Required)Please select oneLess than $10M$10M to $40M$40M to $50M$50M to $60M$60M to $100MGreater than $100MHas the company's annual budget ever exceeded $50M?(Required)Please select oneYesNoNot sureHas the company generated greater than $50M in revenue in any year since it was founded?(Required)Please select oneYesNoNot sureWhat has been the largest funding round received to date?(Required)Please select oneLess than $1M$1M to $10M$10M to $50M$50M to $100MGreater than $100MTIP ❖ The QSBS guidelines define “small” companies as those with gross asset levels below $50 million. ❖ Stock issued after a company has exceeded $50 million in aggregate gross assets will not qualify as QSBS. Stock issued before that threshold was surpassed is eligible for qualifying as QSBS, and will continue to qualify after the company exceeds the $50 million threshold. ❖ Aggregate Gross Assets include cash and aggregate adjusted basis of other property held by the corporation; it does not consider the valuation of the company. This data is best evidenced through the tax return balance sheets and details of fundraising rounds. IRC Section 1202(d) QSBS Qualifying Criteria: Use of AssetsTo the best of your knowledge, now and throughout the company’s history, have at least 80% of the company’s assets being used in the active conduct of the company’s main business activity?Please select oneYesNoHave greater than 10% of the company’s assets been invested in Non-Subsidiaries (i.e. passive investments)?Please select oneYesNoAre more than 10% of the company’s assets comprised of real estate assets not used in the active conduct of the company’s primary business?Please select oneYesNoSince the company’s first 2 years in business, have more than 50% of the company’s assets each year been used for Research and Development?Please select oneYesNoTIP ❖ The QSBS requirements not only look at the quantity of assets the company has, but also seeks to ensure that the company is applying “substantially all” of its assets towards the qualified trade or business. ❖ IRS guidance on exactly how elements of the Active Business Requirement are satisfied is limited, however the code states: ➝ At least 80 percent (by value) of the assets of the corporation are used in the active conduct of one or more qualified trades or businesses during substantially all of the taxpayer’s holding period for such stock. ➝ No more than 10% by value (in excess of liabilities) of the corporation’s assets consisted of stock or securities in corporations which are not subsidiaries. ➝ No more than 10% by value of the corporation’s assets consisted of real estate not used in the active conduct of a trade or business. ➝ Working capital must be at “reasonable” levels and any assets held for investment to finance R&D must be less than 50% of the Company’s total assets after the first 2 years of the corporation’s existence. IRC Section 1202(e) QSBS Potentially Disqualifying Criteria: Stock RedemptionsHas the company bought back any of its stock since it was founded?(Required)Please select oneYesNoNot sureTIP ❖ The previous sections each dealt with the “qualifying” criteria, however there are also several actions that can “disqualify” stock from being QSBS eligible. ❖ The main disqualifying criteria involves ”stock redemptions,” whereby the company repurchases a portion of its securities. While certain types of redemptions are permitted per IRC Section 1202(c)(3) (i.e. redemptions due to terminations, death, divorce, etc.), other redemptions, if considered material, can negate the QSBS status of portions or potentially all of the company’s shares. Section 1202-2 QSBS Qualifying Criteria: Securities Outstanding What level of funding has the company received to date?Please select oneNo outside financing (i.e. bootstrapped)Pre-Seed (i.e. SAFEs / Convertible Notes)Seed RoundSeries ASeries BSeries CSeries DOtherWhat types of securities has the company issued to date? Founder Shares Convertible Notes Other Debt Securities SAFE(s) Preferred Equity Common Equity Stock Options Other TIP ❖ To claim a QSBS exemption, as per IRC Section 1202(b)(2), qualifying stock needs to have been held for at least 5 years. ❖ The starting date of the 5-year holding period varies based on security type. For example, the “QSBS clock” for convertible notes does not start until the notes convert to equity and the clock will not start on stock options until the options are exercised. ❖ Stock held for less than 5-years may be eligible (as per IRC Section 1045) to be rolled over into other QSBS whereby the holding period tacks to the previously held stock. Section 1202(c)(1) The following summarizes a “high-level” overview of the company’s Qualified Small Business eligibility based on the information you provided. Entity Type No disqualifying actions were detected regarding entity type. If your company converted from another entity type to a C-Corp, there could be various QSBS related impacts to consider. Only C-Corporations or entities taxed as C-Corporations are eligible to issue Qualified Small Business Stock.Qualified Trade or Business No disqualifying actions were detected regarding qualified trade. While certain business activities do not qualify for QSBS, it depends on how the IRS defines these businesses' activities and how much of the business is devoted to such activities. We can help you navigate this.Gross Assets It seems likely that the company would be considered a “small business” regarding QSBS as it appears gross assets never exceeded $50 million More careful analysis would need to be performed to identify if / when the Company may have exceeded the $50M gross asset threshold, after which equity securities issued would no longer be able to qualify as QSBS. Since the time the business surpassed $50M in gross assets the business is no longer eligible for issuing QSBS. However, QSBS issued before exceeding the $50M threshold may still qualify as QSBS if the other criteria were met.Use of Assets While it appears likely that the Company has met the Active Business Requirement to date, these requirements need to be met for “substantially all” of each shareholder’s holding period in order for their shares to qualify as QSBS. It appears that the Company may not have met the Active Business Requirement, however, it is important to further consider the timeframe when the Company may have met the active business requirement as stock can still qualify as QSBS if these requirements were met for “substantially all” of a shareholder’s holding period.Stock Redemptions No disqualifying actions were detected regarding stock redemptions. Stock Redemptions can disqualify some or all of a company’s shares from QSBS eligibility.A deeper analysis of the company can help determine the likelihood of whether or not the company fits the criteria of being a Qualified Small Business. For a deeper analysis of your company, please hit “submit” below and a member of our team will be in touch. This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.