A small business owner faces many challenges while running their operation. Financial stability is key to surviving and growing in today’s competitive world. One of the ways the government tries to encourage small businesses is by providing a tax benefit to qualified small business corporations (QSBCs).
A QSBC is a corporation that meets certain requirements, including the following:
1. It has to be a domestic corporation;
2. It cannot have more than $50 million of assets at the time of issuing stock;
3. At least 80% of the corporation’s assets must be used in the active conduct of a qualified business; and
4. The corporation must have gross receipts equal to or less than $25 million annually.
If your corporation meets these requirements, then you may be eligible for a tax benefit known as the QSBC exclusion. The exclusion allows the owner(s) of a QSBC to exclude as much as 100% of the gain from selling the business.
For instance, if a small business owner sells their shares for $5 million and the initial investment for the shares was $1 million, then the owner can exclude the entire $4 million gain from income. If the QSBC were a C Corporation, then the gain would be taxed at the corporate level and then again at the personal level when the proceeds are distributed to the shareholders. QSBC exclusion provides an incentive for small business owners to invest in their businesses without having to worry about the potential tax consequences when selling.
It is important to note that there are limitations to the QSBC exclusion. Firstly, the QSBC exclusion is only available for the sale of Qualified Small Business Stock held for more than five years. Secondly, the maximum amount of QSBC gain exclusion cannot exceed ten times the original cost of the QSBC stock. For example, if the original investment was $500,000, then the maximum exclusion could be $5 million. Lastly, there are certain restrictions on the type of business that is eligible for QSBC treatment.
The QSBC exclusion is a significant tax benefit that can be advantageous for small business corporations. It allows owners to recoup their investments tax-free if certain requirements are met. Tax planning is essential for business owners in order to take full advantage of this benefit. As with any tax provision, it’s important to consult with a tax professional to ensure that you qualify for the QSBC exclusion.
