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Checklist for QSBS Qualification
Here’s a checklist to help you evaluate if a small business qualifies for QSBS:
1. Entity Type
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The business must be a domestic C Corporation. S Corporations, LLCs, and partnerships do not qualify.
2. Gross Assets
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The corporation’s total gross assets must not have exceeded $50 million at any time before and immediately after the issuance of the stock.
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This includes the money received from the issuance of the stock.
3. Active Business Requirement
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At least 80% of the corporation’s assets must be used in the active conduct of one or more qualified trades or businesses.
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The business should not be predominantly holding investments or managing investment income.
4. Qualified Trade or Business
The company must be engaged in a qualified trade or business. Certain industries are excluded, such as:
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Service businesses in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services.
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Banking, insurance, financing, leasing, investing, or similar businesses.
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Farming (including raising or harvesting timber).
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Production or extraction of oil, gas, or other natural resources.
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Operating a hotel, motel, restaurant, or similar business.
5. Original Issuance
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The stock must be acquired by the taxpayer at its original issue (directly or through an underwriter), in exchange for money, property (not including stock), or as compensation for services provided to the corporation.
6. Holding Period
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The investor must hold the stock for at least five years to qualify for the tax benefits associated with QSBS.
7. Date of Stock Issuance
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The date when the stock was issued is also relevant, as the tax benefits vary for stock issued at different times. For instance, stocks acquired after September 27, 2010, may qualify for a 100% exclusion on capital gains.
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