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What is QSBS?

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A QSBS is a ‘qualified small business stock’. That is any stock which was acquired from a qualified small business in recent years. Any appropriate type of stock purchased after August 10 1993 will count.

What Type of Company Counts?

A Qualified Small Business is a C Corporation that is active, and whose assets, when valued at their original cost, are rated at less than $50 million when the stocks are issued.

What is QSBS Good For?

The main reason that people are interested in QSBS is the tax benefits associated with the stocks. To claim those tax benefits, there are a few conditions which must be met.

– Firstly, the investor must be a person, not a corporation.

– Secondly, the investor must have purchased the stock when it was originally issued, rather than via any
secondary market.

– Thirdly, the investor must have held the stock for a period of five years or more.

– Finally, a minimum of 80% of the assets of the issuing corporation must be used to operate the trades or businesses that the company was set up for.

Only some companies are eligible to be QSBs. A company that belongs to the financial sector, personal services, hospitality, farming or mining industries will not be eligible. There is a full list of industries and their status published in Section 1202 of the Internal Revenue Code

So, if you’ve been wondering “What is QSBS?”, you should take into account a few things when working out if an old investment is likely to qualify. If you’re making a new investment, then remember that you must think long term. Yes, QSBS is treated quite favorably for the purposes of capital gains, assuming all of the conditions are met. The size of the tax break depends on when the stock was purchased and how long it was held on to before it was released.

If an investor decides to sell their QSBS before the holding period runs out, then they have the option of deferring their capital gains if they take the proceeds from that stock, and invest it immediately into another company’s QSBS.

The rules can be complex, so it is a good idea to seek advice from an accountant before you spend a lot of money on any stocks or shares. One act that you should be interested in is the Protecting Americans from Tax Hikes Act of 2015. This allows investors to exclude their capital gains, up to a cap of $10 million of 10 times the adjusted basis of the investment. If you are fortunate enough to have invested enough to make greater gains than that, then there will still be capital gains, but at a lower level.

Other acts of interest include the Alternative Minimum Tax, and the Net Investment Income tax. These may be of use to you, with tiered amounts of capital gains tax applying depending on the date the investment was made, and the amount of gains that would occur.

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