Qualified Small Business Stock Tax Information

Qualified Small Business Stock (QSBS) treatment of angel investments are often overlooked as tax codes that can incentivize investors by reducing the after-tax risk and raising the after-tax returns.

§1244 – Loss Treatment

Losses are above the (AGI) line deductions. Shareholders can deduct QSB stock as ordinary losses should the startup fail. With charitable donations treated as below the line deductions, a startup investment is a better tax break!

Requirements

Applies to individuals 1 investing in a C-corp startup. Must invest in the first $1M of capital in an equity-like instrument.

§1202 – Gains Treatment

Profits from exits are 100% tax free. Permanent tax exclusion of 100% of gains on the sale or exchange of QSB stock acquired after September 27, 2010 and held for more than 5 years. $10 million limit on exclusion for each transaction.

Requirements

Applies to individuals 1 investing in a C-corp startup. Startup must make a product (not a service business).

1045 Exchange – Gains Rollover

§1202 gains can be reinvested tax free. Shareholders can roll over capital gains from the sale of QSB stock pre-tax if other QSB stock is purchased. Five-year holding period for 100% tax exclusion under §1202 can be met with a holding period of new investments.

Requirements

Applies to individuals 1 investing in a C-corp startup. Must reinvest within 60 days from exit into another QSB.


1 Investors must invest directly or via a pass-through entity such as an LLC or revocable trust into an equity-like instrument such as preferred stock or a convertible security. Investing through a debt instrument such as a convertible note does not qualify.

The Legacy Funds LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.