Tax Considerations for Mergers and Acquisitions: Qualified Small Business Stock and its Tax Benefits
By Devon R. McDonald , Thomas A. Mitchell
Qualified Small Business Stock (QSBS) Benefit
- $10 million (reduced by any amount excluded in prior years from sales of the same QSBS); and
- 10 times the shareholder’s adjusted tax basis in the QSBS stock.
C Corporation Considerations
High-Level QSBS Requirements
- Stock of C corporation must have been acquired by an individual, trust, or estate subsequent to 1993 in exchange for money, other property, or compensation for services.
- QSBS benefits may be available if the QSBS is held by a partnership or “S” corporation. Most notably the indirect owner of the QSBS must have held such QSBS via such partnership or S corporation at the time such pass-thru entity acquired such stock, and at all times thereafter before the disposition of such stock.
- During substantially all of the period since the issuance of stock, at least 80% (by value) of the assets of the corporation issuing the QSBS were used in an active conduct of a “qualified trade or business” (the 80 Percent Test).
- A “qualified trade or business” means a business other than:
- any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees,
- any banking, insurance, financing, leasing, investing, or similar business,
- any farming business (including the business of raising or harvesting trees),
- any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A (e.g., oil and gas), and
- any business of operating a hotel, motel, restaurant, or similar business.
- Notwithstanding the exclusion of some companies performing “services” in specified fields like health, the IRS has ruled that companies that deploy technology, manufacturing assets, or other intellectual property to provide services exclusively to clients in the healthcare industry would nonetheless qualify for QSBS status. The qualification for QSBS benefits of a service business may be a difficult question to answer as the guidance is limited.
- The corporation issuing the QSBS must have an adjusted (tax) basis of its gross assets no greater than $50 million immediately after the share issuance, which includes the issuance (and thus counts any money or property contributed as part of the issuance) in calculating the limitation. The full details of how this $50 million is calculated are beyond the scope of this article.
QSBS Holding Period
Disclaimer: The information in this post is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from our firm or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
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