You started your business and it grew beyond your wildest dreams. Now, a potential purchaser has approached you to acquire your business. Your first thought after, “I’m going to be rich!”, is “How much of my money will the IRS want from me?”
If your stock qualifies as “qualified small business stock” (QSBS) then that big payoff could escape income tax. Prior to 2015, Internal Revenue Code Section 1202 provided a tax free benefit in certain situations for stock acquired after September 27, 2010, but before 2015. The “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) restored the QSBS provisions for stock acquired in 2015 and thereafter.
Now, subject to certain limits, you may exclude from gross income 100% of any gain realized on the sale or exchange of QSBS held for more than five years. Also, the excluded portion of the gain from eligible QSBS is not treated as an alternative minimum tax preference item.
Stock qualifies as QSBS only if it meets all of the following tests:
- it must be stock originally issued after Aug. 10, 1993;
- as of the date the stock was issued, the corporation was a domestic C corporation with total gross assets of $50 million or less (a) at all times after Aug. 9, 1993 and before the stock was issued, and (b) immediately after the stock was issued;
- in general, you must have acquired the stock from the corporation, either in exchange for money or other property or as pay for services to the corporation; and,
- during substantially all the time you held the stock: the corporation was a C corporation; at least 80% (by value) of the corporation’s assets are used in the active conduct of one or more qualified businesses; and the corporation was not a foreign corporation, or certain other types of companies.
A qualified business cannot be: a business involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services or a business whose principal asset is the reputation or skill of one or more employees; a banking, insurance, financing, leasing, investing, or similar business; a farming business (including the raising or harvesting of trees); a business involving the production of products for which percentage depletion can be claimed; or a business of operating a hotel, motel, restaurant, or similar business.
For each tax year, the amount of gain eligible for the exclusion is limited to the greater of: $10 million ($5 million for married persons filing separately), or 10 times your total adjusted basis in QSBS of the corporation disposed of by you in the tax year.
The above is a brief synopsis of the rules regarding QSBS. If you’d like to discuss these rules or any other business issue you might have, please contact:
firstname.lastname@example.org or (312)368-0100