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Qualified Small Business Stock ("QSBS")

Qualified Small Business Stock ("QSBS")

POTENTIAL TAX BENEFITS FROM INVESTING IN QUALIFIED SMALL BUSINESS STOCK (“QSBS”)

The Major Tax Reform Bill signed by President Donald Trump and passed by Congress in December 2017 could significantly alter your tax situation in 2018 and beyond. The Tax Cuts and Jobs Act of 2017 (“TCJA”) has resulted in extensive changes in how many American individuals and businesses are taxed. It is important to note, however, that the new tax reform leaves untouched the significant incentives and favorable treatment of investments in Qualified Small Business Stock (“QSBS”). We believe that most investment opportunities offered by SternAegis Ventures qualify as QSBS. Therefore, we wanted to remind you about the potentially large tax benefits of investing in QSBS and are sending you the attached summary of the key aspects of this tax saving provision.

Pursuant to Tax Code Section 1202 and Section 1045, taxpayers who hold QSBS for more than (5) five years can exclude 100% of the capital gain on up to $10 million provided that the shares were issued after September 27, 2010. In addition, taxpayers who have no met the (5) five year hold period, but have held the QSBS for (6) six months or more, can roll the QSBS capital gain into a new (QSBS) Qualified Small Business Investment, as long as they reinvest those proceeds within (60) sixty days thereby deferring the tax. Please consult your independent tax advisor for additional advice concerning this topic. 

Potential tax benefits and how they are achieved:

  • eliminate income taxes on capital gains from an equity investment in a Qualified Small Business by holding the investment for 5 years or more; or,
  • defer income taxes on capital gains from an equity investment in a Qualified Small Business by holding it for 6 months or more before selling it and then rolling over the entire proceeds within 60 days into a new investment in a Qualified Small Business.

Characteristics of a Qualified Small Business:

  • assets less than $50 million at time of the investment;
  • actively engaged in a business, which may be principally R&D, other than health and professional services, hospitality such as hotels and restaurants, real estate, banking, insurance, finance, leasing, and farming
  • is a C corporation; and,
  • the QSBS is acquired directly from the issuer.

The amount of capital gains on a single investment that can be free of capital gains tax or deferred of capital gains tax by means of a rollover investment:

  • the greater of $10 million or
  • 10 times the cost of the investment.


Sources:
“Qualified Small Business Stock: An Opportunity for Tech Startups,” McGuire and Malczewski, October 1, 2013
“Qualified Small Business Stock Is An Often Overlooked Tax Windfall,” Johnson, February 17, 2016
“The Small Business Stock Advantage – QSBS – The Basics,” Marcum LLP, Winter 2017/2018

Disclaimer: SternAegis Ventures is not engaged in the income tax advisory business and this should not be deemed in any manner to constitute legal or tax advice.  This summary has been generated from third party sources and is being provided solely for the purpose of bringing to the attention of our clients certain sections of the Federal income tax code that may or may not be applicable to a particular investment.  Readers are urged to consult with their own professional tax advisors for the most current information and to obtain professional advice before acting on any of the information presented.    

Brokerage and investment advisory products and services, are offered through Aegis Capital Corp, a member of FINRA and SIPC. Insurance products are made available through, ACC General Agency, a licensed insurance agency. For those persons inquiring from states where a specific associate is not currently securities and/or insurance licensed, the associate will not transact business in that state or provide follow-up individual responses, until after the associate obtains the appropriate registration in the applicable state.

The information provided should not be relied upon in isolation for the purpose of making an investment decision. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. Prior to making any investment or financial decision, an investor should seek advice from a financial, legal, tax and other professional that consider all of the particular facts and circumstances of an investor's situation. The opinions expressed and material provided are for information purposes only and is not an offer, recommendation, or solicitation of any product, strategy or transaction. Any views, strategies or products discussed may not be appropriate or suitable for all individuals and are subject to risks.

Investment and insurance products offered are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.

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