Qualified Small Business Stock (QSBS): A Tax-Saving Opportunity for Florida C-Corporations
Could Your Florida C-Corporation Benefit from Qualified Small Business Stock (QSBS)?
As a corporate law firm, we know that Florida business owners are always looking for ways to maximize company growth while minimizing tax liabilities. One powerful tool that can accomplish both goals is Qualified Small Business Stock (QSBS). C-corporations that meet certain requirements might be able to exclude up to some of the gains when selling company stock, which can potentially save millions in taxes.
What is Qualified Small Business Stock (QSBS)?
QSBS refers to stock in a C-Corporation that meets the specific requirements under Section 1202 of the Internal Revenue Code (IRC). If your stock qualifies, then you’ll be able to exclude gains from its sale subject to certain limitations. This exclusion has a cap of $10 million or 10 times the adjusted basis of the stock, whichever is greater. While it only applies to federal taxes, it can still provide significant savings for business owners and investors.
- Alice is an investor who purchased $1 million worth of QSBS in a startup company. The startup meets the criteria for QSBS, including its qualification as a small business and meeting the holding period requirements.
- After holding the stock for five years, Alice sells her shares.
- The aggregate adjusted basis of Alice’s stock is the original purchase price of $1 million.
- The greater of $10 million or 10 times the adjusted basis is the same amount — $10 million.
- Since Alice’s gain from selling the stock is $3 million, we compare it to the cap: $3 million (gain) < $10 million (cap).
- As a result, Alice can exclude the entire $3 million gain from her taxable income!
- The aggregate adjusted basis of Alice’s stock is the original purchase price of $1 million.
- Tax Benefit:
- Without the QSBS exclusion, Alice would have paid capital gains tax on the entire $3 million gain. However, thanks to QSBS, she can exclude the gain, resulting in significant tax savings.
Why Florida Business Owners Should Consider a C-Corporation Structure
If you want to take advantage of QSBS, then your business needs to be structured as a C-Corporation. This setup can also be beneficial for Florida business owners who are looking for outside investments, plan on going public, or want to sell their companies down the line. By establishing your business as a Florida C-Corporation from the start, you’ll be in a better position to qualify for QSBS and to enjoy the associated tax advantages and savings.
Ready to start your C-Corporation? Schedule a consultation to get started.
How to Qualify for QSBS
To qualify for QSBS treatment, your Florida C-Corporation must meet several requirements:
1. The corporation must be a domestic C-corporation.
2. The corporation’s gross assets must not exceed $50 million at any time before and immediately after the stock issuance.
3. At least 80% of the corporation’s assets must be used in the active conduct of a qualified trade or business (generally excluding service businesses, consulting banking, insurance, investing, and hospitality, although other restrictions also apply).
4. The stock must be acquired by the taxpayer at its original issue in exchange for money, property, or services.
5. The stock must be held for more than five years.
Benefits of QSBS
Let’s say that, for example, you start a Florida C corporation and invest $1 million in the company in exchange for stock. Thanks to your hard work, you’re able to sell it for $11 million after holding it for five years, leaving you with a profit (gain) of $10 million. If that stock qualifies for QSBS status, then that $10 million can be excluded from federal taxes. Assuming that capital gains tax is at a 20% rate, this can potentially result in over $2 million in savings.
Clarification on Consulting Services
On October 20, 2023, the IRS issued a private letter ruling (PLR 202342013) to a data management firm that helped clarify the agency’s definition of consulting services. This is important because consulting and advisory firms are generally disqualified from QSBS status.
The IRS’s reasoning here helps narrow the scope of what counts as engaging in the field of consulting, which should make things easier for business owners seeking to qualify for QSBS. Essentially, they state that a business won’t be disqualified as long as:
1. The advice and/or counsel is ancillary and supportive of the business’s primary trade.
2. The business doesn’t bill for advice and counsel separately, only for the final product.
Takeaways
QSBS can be a game changer for Florida business owners, assuming their entities qualify. An attorney’s tax opinion letter can help determine your C-corporation’s eligibility. If you’re interested in benefiting from QSBS tax exemptions, then forming a C-corporation is the best place to start. Don’t forget that a Florida corporate attorney’s guidance can help ensure that your new entity can qualify for QSBS when the time comes, too. For more, contact us to find out if you qualify for a tax opinion.
Disclaimer: This article is for educational purposes only and does not constitute legal advice. The information provided is general in nature and may not apply to your specific situation. Tax laws are complex and subject to change, so it’s essential to consult with a qualified tax professional and a corporate law attorney to determine whether your business qualifies for QSBS and to develop a personalized strategy for maximizing your tax savings. FL Patel Law PLLC is a Florida corporate law firm that can assist you with establishing your C-corporation.
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