Here’s a conversation starter around your potential investment opportunity: QSBS. One appealing incentive program available is leveraging Qualified Small Business Stock (QSBS). QSBS can be a great way to get investors interested in your company, and a great option for investors who want to avoid paying more taxes than they need. It’s often a win-win, but as many incentive programs do, it comes with a few hoops to jump through to ensure everything falls within the right parameters as a qualified small business (QSB) and as QSBS. It can feel overwhelming, but the implications are beneficial both for investors AND for those seeking investment!
What is Qualified Small Business Stock (QSBS)?
QSBS refers to shares an investor holds in a business that fit the qualifications of a “qualified small business” within Section 1202 of the Internal Revenue Code. Sometimes you’ll see this referred to as “Section 1202 stock.”
The main criteria for being eligible are:
- Company issuing the stock must be an active, domestic C-corporation.
- Company must be a “qualified trade or business,” including those in technology, wholesale, retail, and manufacturing. However, financial services, hospitality, mining, farming, and personal services are all explicitly disqualified.
- 80% minimum of the corporation’s assets must be leveraged to conduct one of the qualified businesses or trades.
- The corporation’s assets cannot exceed $50 million at the time of issuance.
*Of course, these requirements should always be compared with the current IRC requirements.
The Benefits of QSBS:
QSBS lets shareholders of qualified small businesses realize capital gains without paying taxes. There are specific parameters and requirements for holders of QSBS, so it’s always advised to get your CPA and/or attorney involved in the conversation to ensure you are eligible or that a potential investment opportunity is eligible.
The Why Behind QSBS:
If you could avoid paying capital gains tax, you would. Anyone in their right mind would enjoy this incentive. These incentives were originally designed to help promote investment in small companies, ideal ones being early-stage tech startups. Companies seeking capital can leverage a QBS status to their advantage to attract new investment.
Documentation is Vital
Incentives and programs like these clearly have a lot of requirements around them, which make documentation vital on all sides. As a qualified small business, having your documentation organized and accessible will make investment and conversations around investment easier. Financial statements and supporting documents should be kept and organized to make it easy to get investors interested. On the flip-side, as an investor, we are going to be focused on documenting the process to ensure our investment is protected from high tax implications down the road. Don’t be surprised if investors want to include QSBS representations, warranties, and covenants in the financing documents.
Is QSBS the only thing to consider in an investment? Absolutely not! But is it something worth looking into? For sure! QSBS could be a great angle to leverage as your company seeks out further capital and it has been a great incentive for investors like us at Sentiero as we consider investment opportunities. It’s worth having it as part of the investment conversation!
Beneficial Potential for Both Investors & Small Businesses with QSBS
Here’s a conversation starter around your potential investment opportunity: QSBS. One appealing incentive program available is leveraging Qualified Small Business Stock (QSBS). QSBS can be a great way to get investors interested in your company, and a great option for investors who want to avoid paying more taxes than they need. It’s often a win-win, but as many incentive programs do, it comes with a few hoops to jump through to ensure everything falls within the right parameters as a qualified small business (QSB) and as QSBS. It can feel overwhelming, but the implications are beneficial both for investors AND for those seeking investment!
What is Qualified Small Business Stock (QSBS)?
QSBS refers to shares an investor holds in a business that fit the qualifications of a “qualified small business” within Section 1202 of the Internal Revenue Code. Sometimes you’ll see this referred to as “Section 1202 stock.”
The main criteria for being eligible are:
- Company issuing the stock must be an active, domestic C-corporation.
- Company must be a “qualified trade or business,” including those in technology, wholesale, retail, and manufacturing. However, financial services, hospitality, mining, farming, and personal services are all explicitly disqualified.
- 80% minimum of the corporation’s assets must be leveraged to conduct one of the qualified businesses or trades.
- The corporation’s assets cannot exceed $50 million at the time of issuance.
*Of course, these requirements should always be compared with the current IRC requirements.
The Benefits of QSBS:
QSBS lets shareholders of qualified small businesses realize capital gains without paying taxes. There are specific parameters and requirements for holders of QSBS, so it’s always advised to get your CPA and/or attorney involved in the conversation to ensure you are eligible or that a potential investment opportunity is eligible.
The Why Behind QSBS:
If you could avoid paying capital gains tax, you would. Anyone in their right mind would enjoy this incentive. These incentives were originally designed to help promote investment in small companies, ideal ones being early-stage tech startups. Companies seeking capital can leverage a QBS status to their advantage to attract new investment.
Documentation is Vital
Incentives and programs like these clearly have a lot of requirements around them, which make documentation vital on all sides. As a qualified small business, having your documentation organized and accessible will make investment and conversations around investment easier. Financial statements and supporting documents should be kept and organized to make it easy to get investors interested. On the flip-side, as an investor, we are going to be focused on documenting the process to ensure our investment is protected from high tax implications down the road. Don’t be surprised if investors want to include QSBS representations, warranties, and covenants in the financing documents.
Is QSBS the only thing to consider in an investment? Absolutely not! But is it something worth looking into? For sure! QSBS could be a great angle to leverage as your company seeks out further capital and it has been a great incentive for investors like us at Sentiero as we consider investment opportunities. It’s worth having it as part of the investment conversation!