Define: Qualified Small Business Stock

QSBS refers to stock issued by a qualified small business that meets certain criteria set by the Internal Revenue Code (IRC). It offers potential tax benefits to investors.

Investors who hold QSBS for at least five years may be eligible for a federal tax exclusion of up to 100% of their capital gains upon sale or exchange of the stock.

To qualify, a business must meet specific requirements, including being a domestic C corporation, having gross assets of $50 million or less at the time of stock issuance, and engaging in an active trade or business.

Yes, the exclusion is subject to a cap, which is generally the greater of $10 million or 10 times the taxpayer’s basis in the QSBS.

No, certain types of businesses are excluded from qualifying, such as professional service firms, financial institutions, and businesses involved in farming, mining, or hospitality.

No, QSBS must be acquired directly from the issuing corporation in exchange for money, property, or services.

Some states offer their own tax incentives for QSBS, such as additional exclusions or reduced tax rates. However, these benefits vary by state, so it is important to consult with a tax professional familiar with the specific state’s laws.

No, QSBS cannot be held in tax-advantaged accounts like IRAs or 401(k)s. The tax benefits of QSBS are only applicable to individual taxpayers.

If the business ceases to meet the requirements of a qualified small business within five years of issuing the stock, the tax benefits associated with QSBS may be lost.

Yes, taxpayers must report the acquisition and disposition of QSBS on their tax returns and provide supporting documentation to substantiate their eligibility for the tax benefits. It is advisable to consult with a tax professional to ensure compliance with reporting requirements.