Accounting
Qualified Small Business Stock Inc.
TAX FREE SALE OF A BUSINESS
RECEIVE $10 MILLION OR MORE
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Tax-Free Gain with a Qualified Small Business Stock (QSBS) Company
A Qualified Small Business Stock plan (QSBS) allows anyone to start or buy a business using either their personal cash investment or by rolling over other types of assets (not retirement funds) as an initial investment to purchase stock in a corporation.
Structure The Business Correctly - Sell It Tax-Free
The stock in a QSBS must be original issue stock within a domestic C Corporation, where the company is typically involved in retail, wholesale, or a technology business. Under section 1202 of the Internal Revenue Code (IRC), a QSBS excludes any business, where the principal asset is the reputation or skill of any one or more of its employees, such as any financial services, farming, healthcare, hospitality industries, law, engineering, architecture, etc.
Additional Benefits of QSBS
Maximum Tax-Free Profits
There is a maximum amount of gain that is allowed to become tax-free. Upon the sale of the business, all sales profits up to the greater $10 million or 10 times the stock basis, will become tax-free and available at any age to the business owner. In order to benefit from the tax- free benefits, the investor has to have a five-year holding period of the stock. Any QSBS is required to be held for six months. If sold after the six months, then you have 60 days to reinvest in another QSBS stock program to avoid any taxation. If you already own a business, it can be converted over to begin the five-year holding period to qualify for the QSBS status.
How To Setup a QSBS
- The corporation must be a C Corporation.
- In the QSBS it is important to note, that any other corporations cannot own the stock in the entity. The investment is either made through your own personal assets such as a other personal assets rolled over to a QSBS business corporation.
- As an investor, you have the ability to become an employee in your own business, taking a salary as compensation with fringe benefits.
- Programs may acquire and hold property (land), but it is advisable not to hold property within a C Corporation due to double taxation and with the QSBS corporation there are limitations on the amount of assets that are not devoted to business operations.
- All annual business profits will be required to be taxed as a C Corporation in both types of entities.
- Under a C Corporation, if stock is inherited or acquired through a gift, the new owner will step in and continue the five-year holding period requirement from the new original owner in a QSBS.
Financial Records Needed Before Sale
- Under a QSBS, individuals and corporations need to be able to document the date of acquisition, amount, and stock basis, for all originally issued stock.
- It is important that the company also certify the following:
- Verify that it is a domestic C Corporation.
- Has always had $50 million or less in aggregate gross assets, if property/assets are transferred to the corporation, it must be valued at its Fair Market Value (FMV) at the time of contribution.
- Internally the QSBS business (such as operations, research and experimentation, or investments for future working capital and startup activities) qualified under the QSBS rules.
Does Your Business Qualify As a QSBS?
If all rules and regulations are adhered to a great deal of taxes can be avoided upon the sale of either a QSBS Corporation. With a QSBS Corporation the amount of the gain that can be avoided for taxation is set at $10 million or less.

QSBS Information
- Qualified Small Business Stock Exception
- 1202 Qualified Small Business Stock
- Qualified Small Business Stock
- Qualified Small Business Stock Tax on Sale of Stock
- Gain on Sale of Qualified Small Business Stock
- Qualified Small Business Stock IRS
- Qualified Small Business Stock California
- What Qualifies as Qualified Small Business Stock
- Can an S Sorporation be a Qualified Small Business Stock
- Qualified Small Business Stock Exchanged for Stock
- Qualified Small Business Stock Massachusetts