Thinking Ahead to Filing Your 2021 Taxes if You Had a QSBS Gain

Tax Filing 2021

Preparation is essential when it comes to just about everything, including prep for the tax season ahead. This year may include changes to your tax preparation and filing if you had a QSBS gain. Additionally, new questions may arise about tax filing and the pending changes to the QSBS tax exemption codes in the proposed BBBA legislation. 

Tax Season Is About to Begin, and Early Filing is Key 

It’s January, but the tax season is just about to begin. The IRS has announced they will begin accepting 2021 tax returns on January 24, 2022. This year, earlier may be better when it comes to filing your taxes. Treasury officials are urging taxpayers to get their tax returns in as early as possible due to the ongoing pandemic and the lack of IRS resources and employees.

The IRS workforce does not have an overflow of employees at their disposal. For reference, the IRS workforce is the same size today as 50 years ago, despite the 60% population increase. Along with that, over the past two years, 20% of the IRS customer service workforce has been unable to work due to health reasons related to the covid pandemic. Speculations arise that they could be severely impacted again by the Omicron variant wave.  

2021 Tax Planning and QSBS

Additionally, with possible changes to Qualified Small Business Stock (QSBS) on the horizon in the proposed Build Back Better Act (BBBA), how should taxpayers with a QSBS gain, during 2021, plan for filing their taxes? 

In short, the legislation has not been enacted and has been a slow process of review going forward. The QSBS tax exemption still holds that QSBS acquired after September 27, 2010, will be able to benefit from the 100% exclusion up to $10 million or 10x the adjusted basis. However, if the legislation is enacted, the BBBA would reduce the QSBS tax exemption from 100% to 50% (up to the applicable exemption limits) for any gains after September 12, 2021, for taxpayers with more than $400,000 in AGI (including their QSBS gains). 

Learn more about the calculation and exclusion percentages here.

IRS Form 1040 for 2021 is Out

The IRS has recently released the current version of Form 1040, which is the form used by individual taxpayers to file an annual income tax return. As in the past, details of QSBS gains would be listed on Form 8949 and then summarized on Schedule D. 

Look here for further information about the current revision of Form 1040 and instructions for filing.

Also, look here to learn more about section schedule D on Form 1040 and more on filing for capital gains or losses. 

Form 8949 has specific instruction language that states, “[I]f you have sold or exchanged qualified small business stock and can exclude part of the gain [then enter] Q in Column F…and Report the sale or exchange on Form 8949 as you would if you weren’t taking the exclusion and enter the amount of the exclusion as a negative number (in parentheses) in column (g). However, if the transaction is reported as an installment sale, see Gain from an installment sale of QSB stock in the Instructions for Schedule D (Form 1040).”

To learn more on how to file and the IRS Forms that are applicable, look here.

What if the IRS Rules Change After You File?  

The IRS has instructions and documentation in the case proposed legislative changes transpire. In the instructions for Form D, the IRS includes a section labeled “Future Developments.” Here, the IRS posts important information about ongoing developments occurring after the forms are published, including enacted legislation that may affect tax filing.

Look here for further information.

Our Team is Here to Help

The IRS does not require the taxpayer to provide documentation when electing the Section 1202 benefit from the sale or exchange of QSBS; however, the IRS will require documentation if an audit were to occur. It is crucial for the taxpayer to have supporting documentation to prepare for an audit to allow transparency and ease of mind. The team at CapGains is here to help with in-depth risk analysis for your company and/or individual stakeholders. We also provide a highly detailed report for companies and individuals reaching their exits. If you would like inquiry on supporting documentation CapGains can provide for your next tax filing or you have further questions about how the QSBS tax code impacts your investment stock, our CapGains team is here to help you navigate the nuances of QSBS eligibility.

Also, to stay current on the latest proposed BBBA legislation news, join our coalition as we support a healthy economy and growing startup ecosystem.  

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

About QSBS Expert

QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.