Article written by:
Daniel Conroy, CPA
If you are an owner of qualified small business stock (QSBS) or an investor in a fund that owns QSBS, you may be able to exclude from gross income a portion, or all, of the gain from the sale of QSBS.
What is QSBS?
QSBS, also known as Section 1202 stock, is stock originally issued after August 10, 1993, by a C corporation with aggregate gross assets not exceeding $50 million at any time from August 10, 1993, to immediately after the issuance of the stock. The stock must have been issued at its original issue in exchange for money or property, or as compensation for services provided to the corporation. The Section 1202 exclusion applies only to QSBS held for more than five years.
The corporation must also meet an active trade or business requirement other than those specifically excluded. Those businesses that would be excluded would be certain personal service activities (health, law, engineering and accounting), banking and other financial services, farming, mineral extraction businesses and hotels and restaurants. If you are at all familiar with the new 199A deduction, these are the same types of businesses that are generally excluded from that deduction.
Depending on when the stock was acquired, there is potential to exclude 50% to 100% of the gain. Keep in mind that if you are an investor in a fund that holds QSBS, you would have to be invested in the partnership on the date that the partnership acquired the QSBS. In other words, no exclusion would apply if you invested after the QSBS was originally acquired.
Remember, if you are a partner in an investment fund, the partnership should also provide you with the following:
- The name of the corporation that issued the QSBS
- Your share of the partnership’s adjusted basis and sales price of the QSBS
- The dates the QSBS was bought and sold.
This information will be reported to you in a footnote that you receive from the partnership K‐1.
If you believe that you have QSBS that applies to your individual situation, or would like to learn more, contact your GBQ advisor for further guidance. We can work with you to determine if this is applicable to you and at what percentage you may be able to exclude.