If you own stock in a growing business or are considering a future business sale, Qualified Small Business Stock (QSBS) may help you significantly reduce or even eliminate—federal capital gains tax.
What is Qualified Small Business Stock (QSBS)?
Qualified Small Business Stock (QSBS) is a tax incentive under Internal Revenue Code Section 1202 that may allow eligible business owners, founders, and investors to exclude up to 100% of federal capital gains when selling qualifying stock. For those who qualify, QSBS can provide substantial tax savings, potentially saving millions on the sale of a business.
Key QSBS Requirements
To qualify for QSBS treatment, the following requirements generally must be met:
Certain service-based businesses, including law, accounting, consulting, financial services, and health services, generally do not qualify for QSBS treatment.
Potential Tax Savings
Eligible shareholders may exclude up to 100% of federal capital gains on the sale of qualifying stock, subject to certain limits. For many founders, business owners, and early investors, QSBS can translate into millions of dollars in tax savings when selling a business. The exclusion is generally limited to the greater of:
- $10 million of gain, or
- 10 times the shareholder’s tax basis in the stock
For example, a founder who buys stock for $500,000 and later sells it for $12 million may be able to exclude most or all of the gain from federal income tax if the stock qualifies for QSBS treatment.
Planning Opportunities
Because QSBS has specific requirements, planning ahead is important. Business owners, founders, and investors should consider QSBS opportunities when:
- Forming a new business
- Choosing between a C corporation and other entity structures
- Raising capital from investors
- Implementing estate, gifting, or wealth transfer strategies
- Preparing for a future business sale or exit
Early planning can help maximize potential tax benefits, while waiting too long may limit or eliminate eligibility.
Common QSBS Pitfalls
How McConnell Jones Can Help
QSBS can be a valuable tax-saving opportunity. McConnell Jones support clients by assessing QSBS eligibility, entity structure analysis, pre-transaction and exit planning, and tax modeling and planning. Connect with us today to help you navigate QSBS complexities.
About McConnell Jones
Founded in 1987, McConnell Jones (MJ) is a nationally recognized CPA firm delivering Assurance, Tax & Accounting, and Advisory services across a broad range of industries. Headquartered in Houston, Texas with offices in Washington, DC; Dallas and Austin, Texas; Durham, North Carolina; and Atlanta and Columbus, Georgia, MJ provides integrated, high-quality solutions backed by specialized expertise and a client-focused approach.
Tax Disclaimer: This communication is for general informational purposes only and is not intended as tax advice. Application of tax laws depends on specific facts and circumstances. Please consult your tax advisor before taking action.