Qualified Small Business Stock – Section 1202 of Internal Revenue Code
Section 1202 of the Internal Revenue Code provides for beneficial tax treatment for investors who purchase Qualified Small Business Stock (QSBS) in a company. If a stock qualifies as QSBS, investors may exclude up to 100% of the federal capital gains tax associated with the sale of the QSBS, subject to certain limitations. In order for stock to qualify as QSBS, the company and investor must each meet and maintain compliance with a list of certain requirements by the IRS. The primary requirements include, but are not limited to, the following:
1) the company must be a C-Corp,
2) the company must be engaged in a “qualified” trade or business,
3) the company must have less than $50 million in assets at the time of the stock issuance,
4) investors cannot be a corporation, and
5) investors must hold the QSBS for at least 5 years prior to selling.
Given the complexity associated with QSBS requirements, we recommend consulting with legal and tax advisors before taking steps to qualify any stock as QSBS.