As a business owner, imagine your first $10 million in gains being completely tax-free. This is the power of Qualified Small Business Stock (QSBS). Through careful planning, QSBS can:
- Exempt your first $10 million in gains from both federal and many state taxes
- Allow you to “trust stack,” enabling even more tax-free savings across multiple family trusts
- Encourage smarter wealth management by keeping more of your hard-earned gains
Curious how it works? Watch our latest video where we break down exactly how QSBS can transform your tax strategy and help safeguard your wealth. Ready to explore the potential of QSBS for your business?
Our team at Solidarity Wealth is here to help you make the most of this powerful tax tool. Reach out today at info@solidaritywealth.com or call 385-374-1665 to schedule a discovery call.
Transcript
Introduction to Qualified Small Business Stock (QSBS)
Hi, I’m Jeff McClain, CEO of Solidarity Wealth. Today, we’re diving into one of my favorite tax strategies: Qualified Small Business Stock, or QSBS. This powerful tool is outlined in Section 1202 of the tax code and can provide significant tax savings for business owners.
Why is QSBS so exciting? If you qualify, the first $10 million of your gain from the sale of a small business can be federally tax-free. In some states, like Utah, it’s state tax-free as well. This isn’t a deferral—this is real tax savings. To put it in perspective, that can mean a savings of up to $2,845,000 in actual taxes.
QSBS may sound too good to be true, so you might wonder why you haven’t heard of it before. Though QSBS has been around for years, the full 100% tax exemption became possible in 2011. This relatively recent change has made QSBS a powerful and often underutilized tax strategy for qualified small businesses.
The Five Requirements to Qualify for QSBS
To reap these QSBS benefits, there are five main requirements your business must meet:
- Be a Qualified C Corporation: You must hold stock in a C Corporation. This applies at the time you receive the shares, and stock options or warrants don’t count until exercised.
- Meet the Qualified Small Business Criteria: The value of your company’s assets must be $50 million or less at the time you receive the shares. This cap on assets is key to qualifying as a small business.
- Operate as an Active Business: Your business must actively operate, meaning it can’t be passive or simply hold investments. Generally, 80% of the assets must be actively used in business operations.
- Be a Qualified Trade or Business: Certain industries don’t qualify, especially service industries like law, finance, or consulting. However, tech companies, particularly those in SaaS or software, often meet this criterion.
- Hold the Stock for at Least Five Years: To qualify for the exemption, you need to hold onto the stock for five years. If you converted from an LLC to a C Corporation during this time, the five-year clock can begin from the conversion.
Maximizing QSBS Benefits Through Trust Stacking
One exciting strategy with QSBS is called “trust stacking.” This approach allows you to multiply the $10 million tax-free benefit by creating trusts for family members. For example, I have three children, so I could set up a trust for each one and transfer QSBS shares into each trust. This would turn the $10 million exemption into $40 million in tax savings, resulting in over $11 million in actual tax savings. Trust stacking can be a powerful tool for high-net-worth individuals looking to maximize their tax-free gains.
Need Help with QSBS? Solidarity Wealth Can Guide You
If this quick primer on QSBS has sparked some questions, we’d love to help. Our team at Solidarity Wealth specializes in guiding clients through the QSBS process, helping them keep more money in their pockets while aligning tax planning with family and personal goals. We collaborate closely with CPAs and attorneys to create comprehensive wealth strategies that can build long-term financial success.
So if you’re ready to explore how QSBS can fit into your wealth-building plan, give us a call! We’re here to make the complexities of the tax code work for you.
