QSBS Tax Saving

Money, Saving, Savings, Finance, Economy

If you are an individual investor, an employee holding stock options, founder, investment fund, or even a tax advisor you can or can help your clients realize huge tax savings by becoming familiar with an overlooked section of the tax code. Section 1202 allows the above stakeholders to elect a 100% capital gains tax exclusion on the sale of qualified small business stock (QSBS). To qualify as QSBS you must follow certain guidelines over the below topics:

  1. Qualified entity structure
  2. Qualified industry
  3. Qualified size
  4. Active trade or business
  5. QSBS acquisition criteria
  6. QSBS timeline
  7. QSBS gain exclusion cap
  8. Percent of gain excludable

It is important to know about the QSBS exemption if you are one of the five stakeholders addressed previously or could fall into one of those buckets in the future. Next time you are reviewing potential investments or receiving stock options make sure you determine if the investment or options falls within the guidelines of Section 1202. Any investments made after September 27, 2010, will be eligible for 100% capital gains tax exclusion up to $10M or 10x the investment. The capital gains tax rate as of 2020 was 20% + 3.8% for net investment income tax + state capital gains taxes. Almost all states, 44, follow the federal Section 1202 exclusion.

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

About Brett Calhoun

Brett Calhoun is a licensed CPA/ABV and holds an MBA from the University of Missouri. Mr. Calhoun has experience as an operator with startups, venture capital experience, and experience advising growth to mature companies’ management on financial reporting, tax, and valuation issues.