Nate Collins is a Financial Advisor at Raymond James and a Certified Exit Planning Advisor (CEPA®). He works with a select number of business owners and their families to help achieve their financial goals. Nate provides in-depth tax-mitigation strategies and estate planning, as well as comprehensive family-office services. He helps owners understand exit readiness, maximize wealth transfer, gain family alignment, and prepare for “life after exit.”

nate.collins@raymondjames.com
203.635.5420

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An overview of QSBS – one of the most popular tax mitigation strategies.

Qualified Small Business Stock (QSBS) presents a compelling incentive for investors and entrepreneurs alike, offering a blend of tax benefits aimed at fostering investment in small, innovative companies. As we delve into the world of QSBS, it's essential to unpack its definition, benefits, and the specific criteria that must be met to reap these advantages.

What is Qualified Small Business Stock?

At its core, QSBS refers to shares issued by a Qualified Small Business (QSB) that are subject to preferential tax treatment under Section 1202 of the Internal Revenue Code. A QSB is typically a domestic C corporation whose gross assets do not exceed $50 million at the time the stock is issued and which operates in an eligible industry. The intention behind QSBS is to stimulate economic growth by encouraging investments in small businesses that are often at the forefront of innovation and job creation.

The Tax Benefits of Investing in QSBS

The tax benefits associated with QSBS are substantial, designed to attract investors to the potential risks and rewards of funding small businesses. Here are the key benefits:

• Capital Gains Exclusion: Investors can exclude up to 100% of the capital gains from the sale of QSBS held for more than five years, subject to a cap of $10 million or 10 times the adjusted basis of the investment, whichever is greater. This exclusion applies to federal income tax, making it a significant incentive.

• Rollover Provision: Section 1045 of the Internal Revenue Code allows investors to roll over the gains from the sale of QSBS into another QSBS within 60 days of the sale, deferring the capital gains taxes until the new stock is sold.

These benefits are designed to mitigate the risks associated with investing in small businesses, making it a more attractive proposition for investors.

Criteria for QSBS Eligibility

To qualify for QSBS status, both the issuing corporation and the stock itself must meet specific requirements:

• The corporation must be a C corporation based in the United States.

• Gross assets of the corporation must not exceed $50 million before and immediately after the stock issuance.

• The corporation must engage in an eligible business, generally excluding certain investment vehicles, financial institutions, and service-based businesses like health, law, engineering, architecture, accounting, actuarial science, performing arts, athletics, and any business where the principal asset is the reputation or skill of its employees.

• The stock must be acquired at its original issue in exchange for money, property, or as compensation for services to the corporation.

• The investor must hold the stock for at least five years to qualify for the tax benefits.

Conclusion

Qualified Small Business Stock represents a unique opportunity for investors to support emerging businesses while potentially enjoying significant tax benefits. By investing in QSBS, individuals can play a pivotal role in fostering innovation and job creation, contributing to the broader economic landscape. However, navigating the complexities of QSBS requires careful consideration of the eligibility criteria and an understanding of the tax implications. For those looking to explore this investment avenue, it's advisable to consult with a tax professional or financial advisor to fully grasp the benefits and requirements of QSBS.

Contact Nate Collins at nate.collins@raymondjames.com to discuss QSBS and other tax mitigation strategies.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nate Collins and not necessarily those of Raymond James. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.