QSBS Qualified Small Business Stock

1. C Corporation
(If Qualifying for QSBS)
• 21% corporate income tax
• 0% on shareholders if
qualifies for QSBS
• Subject to limitations ($10
million or 10 times the
taxpayer’s adjusted basis)
• Exit: QSBS not available in
asset sale (or, likely, deemed
asset sales)
Passthroughs
• Not subject to corporate
income tax
• Up to 37% on shareholders
• Exit: can choose between
stock v. asset sale
Choice of Entity - Qualified Small Business Stock
GENERAL REQUIREMENTS
 Original issue.
 Five-year holding period.
 100% post- Sept. 27, 2010.
 $50 million Gross Assets
Test.
 Active Business Test.
 No significant redemptions.
Note: California does not follow federal income tax treatment of QSBS under § 1202.
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2. Shareholder Requirements
 Original issuance
 In exchange for money, property or services, NOT stock
 Options can become QSBS on exercise
 What about SAFEs?
 QSBS contributed to an LLC or partnership
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3. Company Requirements
 $50 million is based on cash and tax basis (not FMV)
 Measured before close of financing
 Qualified trade or business - 80% of company assets must be used in a
qualified trade or business
 Working capital safe harbor - No more than half of the value of the
company can be working capital
 Real estate, stock or securities - No more than 10% of the value of the
company can be held in real estate, stock or securities
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4. Redemptions
 Shares issued within 2 years before or 2 years after a redemption from a
taxpayer or related party may not be QSBS
 Shares issued one year before or after a 5% redemption may not be
QSBS
 De minimus ($10,000 or 2%) and exceptions for employment termination,
death, divorce etc.
 Secondary sales
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5. Planning
 S corporations
 LLCs taxed as partnerships
 Stacking through gifting
 Married filing jointly exemption amount
 Rollovers
 351 Transactions
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