Roshani Pandey is a financial advisor and founder of True Root Financial. True Root Financial is located in San Francisco, CA and serves clients across the globe.

If you’re an entrepreneur about to sell your business, the qualified small business stock (QSBS) tax treatment can save you literally millions in tax.

In the following video, we first discuss how the qualified small business stock (QSBS) is the ultimate tax planning tool for entrepreneurs and investors of early start ups. Then, we talk about how to qualify for this tax exclusion. Lastly, we discuss the steps you need to take today.

Why is QSBS is so valuable?

As a founder or an early investor in a company, you will own shares in the company. Now normally, when you sell shares, you have to pay capital gains tax on the profit you made in the sale. This tax can be as high as 23.8% of the profit.

However, if you are eligible for the qualified small business stock exclusion, you can exclude up to $10 million in capital gains from being taxed. That is huge.

With effective trust planning, you can save even more than that.

How do you become eligible for the QSBS exclusion?

Here are the five requirements:

  1. The first and the biggest requirement is that your company be a qualified small business. Most service businesses such as consulting firms, law firms, financial advisory firms don’t qualify. However, most tech, consumer and life sciences companies  do qualify
  2. You must acquire the stocks from the company directly and when you get the stocks, the size of the company should be no more than $50 million
  3. After you acquire the stock, you must hold the stock for 5 years before selling. If for any reason, you sell the company sooner, don’t worry. You can also roll over the exclusion to a new company as long as you do so within 60 days after exiting the old company
  4. Your company should be a C corporation
  5. At least 80% of the company’s assets must be actively used to conduct business. So, it can’t be a holding company

How do you make sure you get this exclusion?

Don’t wait until it’s time to sell the business. Be diligent about documenting the exclusion from early on:

Next steps for you:

First, verify if the company is a qualified small business.

If so, document how you acquired the shares – the purchase date, amount paid, copy of certificates, etc.

If you are investing in a start-up, ask if it qualifies for a QSBS exclusion and document the purchase carefully

Lastly, consult with a tax advisor before the sale.

If you would like to understand how we work with entrepreneurs and help them through the exit, please book an introductory call below:

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