In order to qualify as a “Qualified Small Business”, Section 1202 requires that the corporation to be in a “qualified trade or business.” The general intent of the QSBS tax exclusion is to incentivize investment in entrepreneurship of innovative companies to help drive future economic growth.
Example of a qualifying companies could be a corporation designing/developing a frontier tech product, whether it is software or hardware, such as:
- A new SaaS platform that writes legal documents, however, if the primary service of the company is employees writing legal documents for clients the business may not qualify.
- A company creating an AI robot that quickly changes automobile tires, however, if the primary service of the business is the service of employees changing car tires the business may not qualify.
Below are companies that represent qualifying industries, all of which have been venture capital-backed. If stock acquired in these companies meets the other criteria for QSBS, the tax savings can be substantial.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.