Have you ever heard of qualified small-business stock (QSBS)? I doubt it, it is almost an anomaly.
But there are tax benefits is you own them. You could get a nice tax break when you sell:
The main tax benefit is 100% gain exclusion for many investors. Individuals who acquire QSBS after Sept. 27, 2010, and sell more than five years later can exclude 100% of their capital gain from the sale.
The gain is also exempt from alternative minimum tax. The amount of excludable gain is capped at the greater of 10 times your basis in the stock or $10 million. No a trifling sum.
You get a smaller tax break if you bought QSBS before Sept. 28, 2010. The gain exclusion is 75% for QSBS issued from Feb. 18, 2009, through Sept. 27, 2010, and 50% for QSBS issued from Aug. 11, 1993, through Feb. 17, 2009.
A downside is that some or all of the nonexcludable gain will be taxed at a higher 28% rate instead of the normal top 23.8% tax rate generally applicable for capital gains. The gain taxed at the 28% rate is equal to $10 million less the excludable gain. Note that this 28% rate doesn’t apply to QSBS bought after Sept. 27, 2010. Here are the main QSBS requirements: Only C corporation stock qualifies.
Sales of S corporation stock, partnership interests or LLC units aren’t eligible. The shares must be acquired in an original issuance from the C corp.
Stock bought from an existing shareholder or in a secondary market doesn’t count. The C corp must be a qualified small business when you acquire the stock. The firm’s gross assets at the time of the stock issuance and immediately thereafter cannot exceed $50 million.
Note that for this purpose, the gross assets calculation is based on the firm’s cash and aggregate tax basis of assets and not fair market value.
There is an active trade or business rule. At least 80% of the firm’s assets must be used in the active conduct of one or more qualified trades or businesses. This means that stock acquired in passive companies isn’t considered QSBS. Stock of corporations in certain lines of business doesn’t qualify as QSBS.
Those businesses include banking, leasing, insurance, financing, investing, hotels, restaurants, oil and gas, and farming. Plus personal service businesses in the fields of health, law, architecture, engineering, accounting, consulting, brokerage and more.
Determining whether a corporation is an ineligible personal service business isn’t always black and white. IRS has issued private rulings with complex fact patterns, including a ruling released this year that involved a medical production corporation.
Yep, clear as IRS mud.