Quickfinder page 7-5

What is Qualified Small Business Stock(QSBS)?

               To be classified as QSBS the following requirements must be met:

               1. It must be stock in a C corporation.

2. It must have been originally issued after August 10, 1993.

3. The corporation must have total gross assets of $50 million or less at all times after August 9, 1993, and before it issued the stock. Its total gross assets immediately after it issued the stock must also be $50 million or less. When figuring the corporation's total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation.

4. You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as pay for services provided to the corporation (other than services performed as an underwriter of the stock).

5. The corporation must have met the active business test, defined next, and must have been a C corporation during substantially all the time you held the stock.

6. Within the period beginning 2 years before and ending 2 years after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from you or a related party.

7. Within the period beginning 1 year before and ending 1 year after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from anyone, unless the total value of the stock it bought is 5% or less of the total value of all its stock.

 

How is the sale of QSBS taxed?

A portion or all the gain (depending on when acquired) from the sale of QSBS stock is excluded from gross income if held for more than 5 years.  The taxable portion of the gain is included in income as long-term capital gain subject to a 28% rate.

  • ·        QSBS acquired 08/11/1993 – 02/17/2009 is eligible for a 50% gain exclusion

  • ·        QSBS acquired 02/18/2009 – 09/27/2010 is eligible for a 75% gain exclusion

  • ·        QSBS acquired on or after 09/28/2010 is eligible for a 100% gain exclusion.

Note:  The amount of your gain from the stock of any one issuer that is eligible for the exclusion is limited to the greater of:

  • ·        Ten times your basis or

  • ·        10 million (5 million if MFS)

Can I rollover the gain from the sale of a QSBS to avoid paying tax now?

               Gain from the sale of QSBS held over six months may be rolled over by acquiring the stock of another qualified small business within 60 days.  You must make the choice to postpone gain no later than the due date (including extensions) for filing your tax return for the year in which you sold the stock.

 

Question: Can you discuss QSBS exclusion for California and the ability to exclude federally?

            Since 2013, California does not allow the exclusion from income for QSBS.  Although California residents still get the exclusion for federal tax purposes, they will be liable for California state income tax on the full capital gain.