One of the remarkable things about the US economy is the robust nature of startups and emerging companies. These new enterprises drive growth and create jobs, and in turn fuel additional economic activity, creating a multiplier effect on growth. This issue of MintzTech Connect focuses on an important federal tax exemption available for investing in startup enterprises: what is known as Qualified Small Business Stock (QSBS).
The QSBS rules were amended in July and now enable a potentially even greater tax exemption than previously permitted. QSBS generally allows individual founders and investors in certain emerging growth companies that are C corporations to exclude up to the greater of $15 million (previously $10 million) or 10 times the taxpayer’s tax basis in the QSBS from their taxable capital gains upon the sale or exchange of QSBS. Additionally, while a taxpayer must still hold the QSBS for five years to access the full exclusion, under the recent amendment a taxpayer can obtain a partial exemption of 50% of the eligible gain after only three years and a partial exemption of 75% of the gain after only four years.
Our first article: QSBS Benefits Expanded Under OBBBA provides a detailed analysis of the changes to the QSBS rules. It is an excellent primer for understanding the eligibility requirements for QSBS.
Our second article: The Qualified Small Business Stock Issues Affecting Conversion of an LLC into a Corporation provides a deep dive into the tax benefits available when converting an LLC into a C corporation that is issuing QSBS.
Lastly, in our client spotlight we look at how Conductive Ventures used a new approach to seed financing (“Series SAFE Preferred Stock”) to make sure they could immediately start the five-year clock ticking for the tax exemption provided by QSBS.
Be safe + be well,
Dan + Sam
