Thanks to OCSC Silver Sponsor Armanino LLP for this information about Qualified Small Business Stock (QSBS) tax issues:

Qualified Small Business Stock (QSBS)

There are many reasons we’re currently seeing so many inquiries and requests for assistance around QSBS.

• Numerous companies undergoing funding rounds –investors are demanding QSBS information.
• Increase in secondary offerings.
• Requests in spinoffs inquiring about qualifications.
• More reorganizations and conversions from LLC, where QSBS can be of benefit.
• Consistent number of liquidity events are ongoing, and knowledge in this common risk area is limited; experts are needed to support companies throughout transactions.

The benefits of qualified small business stock (QSBS) were enhanced during the passage of the 2015 Protecting Americans from Tax Hikes Act, and unaltered in the Trump TCJA reform.

What does that mean? It means QSBS is still here – and here to stay (for the near term). Congress has clearly shown a desire to proactively incentivize more investment in small business, progressively increasing the amount of maximum exclusion, now inclusive of the 3.8% net investment income tax.

Are you overlooking significant tax savings in QSBS?

If you were a founder, employee or investor of an early-stage company, you need to be aware of the significant tax benefits of Section 1202, QSBS. In addition, IF your Company is QSBS qualified, your Shareholders would be most interested.

If you have held QSBS for at least five years, a portion of your gain or, in some cases, all of your gain upon sale may be excluded from federal income tax. An exclusion of up to $10 million or 10 times the taxpayers adjusted basis in the stock (time scales exist to calculate the exclusion) with any residual gain taxed at capital gain rates. Moreover, there are favorable rollover and deferral opportunities (under Section 1045) if QSBS gains are invested into other QSBS entities. Attention should be afforded to State(s) compliance and conformity.

How do you qualify for QSBS treatment?

The requirements for a company to qualify as a Qualified Small Business are detailed and require some analysis. At a very high-level, the following are needed to qualify:

• A domestic C-corporation
• Satisfaction of asset limitation analysis
• Qualified trades or businesses, other than services firms(e.g., brokerage, health, engineering, consulting, etc.)
• An entity that is an active trade or business, as defined
• Originally issued and owned Stock
• Stock held in a company without certain disqualifying redemption transactions

The rules for qualification are complex and companies need to engage professionals who can assess qualification and timelines to assure QSBS status. Armanino has professionals who have been supporting companies around Section 1202 and 1045, and we work with not only the companies but executives and the investment community to assure maximizing the benefits.

Why Armanino? 

For more than 50 years, we have focused our tax practice to meet the needs of growing companies – and we understand one size doesn’t fit all. We pride ourselves on a tailored approach specific to your needs. We ask the right questions and we listen. In addition, we believe a consistent engagement team year over year is critical to client satisfaction

Highlights of Our Tax Practice

Tailored services to meet your specific tax, accounting and growth goals.

Integrated and tenured engagement team led by Senior Partners who act as part of your day-to-day team. You’ll work with a consistent, independent, and proficient tax team who understands all GAAP & government compliance requirements.

Lower cost structure, with the depth/breadth to deliver the services you need – without the red tape of much larger firms.

International reach through membership in Moore Global, one of the world's major accounting and consulting membership organizations.

Quick responses to match your tight deadlines. Our work processes are streamlined, and we know that service does not start at 8AM or end at 5PM.

Sample Corporate Tax Clients

Our experts make the tax function a key component of your business strategy. Some of
our notable tax clients include:

• Coinme
• MarkLogic 
• Silicon Labs
• Better Therapeutics
• Immersion
• Copart
• OpenTable
• Twitch

Need to learn more? Contact us!

We have assisted many companies, their employees, and investor base (including VC firms) around education of QSBS and QSBS tax implications, including tailored education around all forms of company equity arrangements such as ISOs, NSOs, ESPS, RSUs, Stock Grants, 83(b) understanding, tax treatments for the variety of issuances, and tax planning considerations.

Our team can walk you through QSBS and assist your Company in developing a position for those shareholders that inquire on the qualifications under Section 1202.

For next steps on how we can support you and your team, contact one of our experts:

Tom Bondi, CPA
Partner, Tax
Tom.Bondi@armaninoLLP.com
408 494 1254

Peter Klinger
Partner, Compensation & Benefits
Peter.Klinger@armaninoLLP.com
925 790 2806

In Orange County contact Ian Martini to learn more about how Armanino can help your growing company.

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