Jul 10 in General Tax Savings Discussion
Section 1202 Qualified Small Business Stock (QSBS) Exclusion
This is an often-overlooked strategy that can offer massive tax savings if you’re investing in or starting a small business. Under Section 1202, gains from the sale of Qualified Small Business Stock (QSBS) can be excluded from federal tax, up to 100%, if certain conditions are met.
Key Requirements:
- The stock must be from a C corporation (sorry, LLCs and S corps don’t qualify).
- The corporation’s gross assets must not exceed $50 million at the time of stock issuance.
- You must hold the stock for at least five years.
- The business must be an active business, not a passive investment.
Benefits:
- Potential to exclude up to $10 million of gains or 10 times the taxpayer’s basis in the stock, whichever is greater.
- Completely eliminates long-term capital gains tax on qualified stock.
Example:
Imagine you invest $500,000 in a startup C corporation. Five years later, your investment is worth $5 million. If the stock qualifies under Section 1202, you could potentially exclude the entire $4.5 million gain from federal capital gains tax.
These strategies might require some upfront work and investment in expert advice, but the potential tax savings can be substantial. If you think either of these strategies could apply to you, it’s worth discussing with a tax professional who can guide you through the specifics.
Let’s use this thread to share experiences, ask questions, and dive deeper into how we can all leverage these advanced tax strategies to our advantage.
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Section 1202 Qualified Small Business Stock (QSBS) Exclusion
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This group is full of future members of Benchmark IQ's 3% club! Before you get there, this is an amazing place to begin saving on your taxes.
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