Entrepreneurs of all kinds know the benefits that stocks can bring to a business. Whether you’re running a startup or have been in the small business world for years, there are always opportunities around every corner. With taxes, especially, entrepreneurs have the potential to save big.
Qualified small business stocks (QSBS) are investment opportunities for enterprises to save with tax exclusions. These stocks consist of the initial purchase, aging and then the final sale where business owners can receive up to $10 million in tax exclusions or 10 times your tax basis.
There are specifications for qualifying though, so you’ll first need to find out if you qualify.
What Is a QSBS?
Businesses often turn to investments and tax write-offs to save money. However, it’s important to understand the power of a QSBS. These stocks have the potential to help countless small businesses across the United States. They combine the tax efficiency with stocks, creating a hybrid investment of sorts.
Specifically, a QSBS works directly with capital gains. These are the profits that you and your business acquire from sales. However, they also come with taxes, too. To claim these tax benefits though, you’ll need stock in your company — which means you must first buy the stock itself. This purchase is something you may have already done years ago.
The amount you pay matters. Say you put down $1 million on the QSBS. Then, once you sell it, you have the potential to gain ten times that amount — $10 million — for tax exclusions. These exclusions help the company flourish and expand, getting a head start for the year to come.
This key to this growth is having a relatively long-term share in your company. That way, you’ll get beneficial returns on investments down the road.
Does Your Business Qualify
After considering how a company will benefit from a QSBS, businesspeople and investors can move on to finding out whether or not they qualify. Keep in mind, there are restrictions on which businesses can and cannot participate. A business qualifies if:
The business is a domestic C corporation that issued the stock to you. The stock must be a direct sale between both parties and not from an outside source. A significant portion of U.S. businesses are C corporations, but you should check to see how the IRS classifies your enterprise.
You or an investor must have held the stock for over five years. This step is crucial because the process takes a while to come into full effect. An entrepreneur cannot gain the full benefits right from the initial investment.
The business must also be small. If it’s a medium-sized or large business, then you likely will now qualify for a QSBS. The net worth of the company must be $50 million or below.
Additionally, the company must be active. It cannot be a holding company. This requirement means that your enterprise will need to be using at least 80% of its assets for business or trade. The momentum must keep going for the business to operate and qualify.
Further, the company cannot be one that falls under the ‘excluded’ category. These include business in industries like finance, farming, mining, health, law, performing arts and hotels. Be sure to rule yourself out of all excluded businesses.
These are the requirements for a small business stock. However, there are dates and guidelines that you must consider as well.
Dates and States
Certain dates in the past will influence what percentage you can receive on tax exclusions from your QSBS. Here’s how much you qualify for based on specific dates:
If you acquired your stock after September 27, 2010, then you will likely be able to qualify for a 100% excludable gain from your QSBS. However, If you invested between February 18, 2009, and September 27, 2019, then that number decreases to 75%. Similarly, an investment before February 18, 2009, will bring 50% excludable gains from the share.
With each of these dates, you will also have to have held the loan for more than five years.
Further, some states have different qualifications for QSBS loans. For instance, New York respects the guidelines of the loan and allows businesses to participate. However, a state like California does not participate in the traditional QSBS standards and instead has its own forms of business stock returns.
You will need to check with your state’s guidelines to make sure that you follow the regulations and fully qualify.
Gaining the Benefits
Investing in a QSBS requires a commitment. If you and your business qualify, then the next step is to reap the benefits. Getting tax exclusions means big things for entrepreneurs like expanding the company and bringing it to new heights. It all starts with a QSBS.
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