QSBS – Qualified Small Business Stock is another one of those interesting acronyms that can really help owners and shareholders of businesses. You can exclude up to $15 million of federal tax on the sale of your startup, business, or company stock with QSBS.
You may be wondering, “How do you do it?”
There are many guidelines to qualify for the tax exclusion. In addition, there have been some positive changes to QSBS since the new tax bill. So there are different rules for QSBS before July 4, 2025, and after July 4, 2025. Let’s start going through it.
QSBS Rules
There are certain rules for you, the company, and there are limits to the exclusion.
Protocol for You
First, there are rules for you as a shareholder. You must own the shares in the business for at least 5 years (pre July 4, 2025). Moreover, the shares have to be received directly from the company. Purchasing shares from a third party or on an exchange do not qualify for QSBS.
Further, you have to acquire the shares after 8/10/1993, preferably after 9/27/2010. More on the timeline later.
Company Guidelines
Now the company must follow certain procedures. The company has to be a domestic C Corporation with less than $50 million in assets when your shares were acquired, before July 4, 2025. For shares issued after July 4, 2025, the asset limit is $75 million. The value of the assets is the adjusted cost basis. Intangible assets do not count towards the number.
Let’s say you own a company for a long time. It’s a growing company and the value of the assets keep increasing. In 2012, the value of the assets was $20 million. In 2015, the value of the assets was $30 million. The company would qualify for QSBS in both instances.
However, in 2019, the value of the assets was $55 million. At this point, there will be no QSBS on the 2019 company shares or additional shares in the future.
Sometimes a company can disqualify itself from QSBS through continued fundraising.
Limits on the Types of Businesses for QSBS
Only certain types of businesses can use QSBS. For example, the business cannot be a service business, such as a law firm, accounting firm, or medical practice. Banking and insurance companies are excluded.
There are many important parameters that you must meet to use this wonderful acronym in your financial life.
Next week we will get into how the gains are not taxed, more detail on the changes in the new tax bill, and what states recognize QSBS.