What is a QSBS Tax Write Off?

Wouldn’t it be nice if every time you purchased something for your business you could just write it off and the government pays for it? That’s what David Rose thought in Schitt’s Creek along with a lot of taxpayers in the US right now. (if you haven’t seen Schitt’s Creek you should give it a watch) In theory, a tax write off is merely an expense item that is allowed by the government to lower your taxable income as an itemized deduction.

An example of general tax write off would be charitable contributions or mortgage interest. Most taxpayers do not tax advantage of itemized deductions unless they are high earners. You get to choose between itemized deductions or the standard deduction. As of 2020 the standard deduction was $12,400 and $24,800 for single and married filing jointly taxpayers, respectively.

What is more important than a tax write off is either a tax exemption/exclusion or tax credits. A tax exemption allows the income to be completed exempt from taxes. A good example of an exemption is the QSBS exemption. QSBS stands for qualified small business stock under Section 1202 of the tax code and allows for up to a 100% exclusion on the capital gains from the sale of small business stock. If you are interested in investing in small businesses definitely check out the below guidelines to determine if your current or potential investment qualifies:

  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

Now, tax credits are used at the end of calculating your adjusted gross income (AGI), which is your income minus all allowed deductions. Tax credits are $1 for a $1, meaning if your owed tax is $1k and you have a $1k tax credit then you will not owe any taxes. Every state offers various tax credits to spur economic development or investments in low-income areas. Check out our state page to see if your state allows for the QSBS exemption or investment tax credits!

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.