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Estate Planning for Founders with QSBS

Section 1202 of the Internal Revenue Code (IRC) promotes investment in certain small businesses by enabling investors to exclude eligible capital gains from qualifying small business stock (QSBS).  This provision provides an immense opportunity for founders and investors of small businesses in fields such as technology, retail and manufacturing to exclude up to 100% of eligible capital gains.

To qualify for QSBS exclusions, there are various requirements that must be met, including:

 

  • The taxpayer must have held the stock for at least five years before the sale or exchange.

  • The taxpayer must have received the stock as an original sale in exchange for money, property, compensation or services (not for the exchange of stock).

  • The business must be an eligible C corporation and have been an eligible C corporation at the time of issue, sale, and throughout the holding period.

  • During the stockholder’s holding period, the small business must be actively engaged in a qualified business and use 80% of assets to conduct qualified trades.

  • The total assets of the business before and until the issuance of the stock must be less than $50 million.

  • The small business must not have repurchased any stock within two years, beginning one year before the stock issuance date.

  • The small business must not have repurchased any stock from the taxpayer or parties related to the QSBS claims within four years, beginning two years before the stock issuance date.

 

If these eligibility requirements are met, taxpayers are able to file for exclusions of up to $10 million.  Moreover, IRC Section 1202 establishes that multiple shareholders are entitled to their own exclusions.  By engaging in certain eligible estate planning transactions, founders and investors with large holdings in QSBS can dramatically increase QSBS gain exclusions.

 

There are several strategies that can be implemented to increase QSBS exclusions; however, this process requires special attention and detailed planning.  At Lara Sass & Associates, PLLC, we have extensive knowledge regarding IRC Section 1202 and how to use it most effectively for the benefit of our clients.  Our firm works directly with our clients to develop a creative estate plan that multiplies a client’s gain tremendously while adhering to various Treasury regulations.  To find out more about planning for QSBS gain exclusion, please contact us.