Qualified Small Business Stock Exclusion: What It Is & Why It Matters

Small business owners talking to Sandy Spring Bank Wealth representative.

Internal Revenue Code Section 1202, also known as Qualified Small Business Stock (QSBS) exclusion, provides a federal tax benefit to eligible shareholders of qualified small businesses (QSB). This exclusion was enacted in 1993 to encourage investment in certain types of businesses. The exclusion recognizes that founding, investing in and working for a startup has inherent risks that the QSBS encourages taxpayers to take.

Section 1202 provides for the full or partial exclusion of capital gain realized on the sale of QSBS. If the requirements are met, then taxpayers may exclude from gross income capital gain in an amount equal to the greater of $10 million, or an annual exclusion of 10 times their basis in the stock sold. The amount excluded can be as high as $500 million. These limitations apply on a per-issuer and per-taxpayer basis. 

To qualify for the exclusion, certain criteria must be met, including:

  • The business must be a Qualified Trade or Business.
  • The stock must be issued from a domestic (U.S.) C Corporation.
  • The stock must have been issued after August 10, 1993.
  • The entity size must be under $50 million immediately following the issuance of the stock.
  • The stock must be held for a minimum of 5 years.

If your business is not a C Corporation, the opportunity may still exist to take advantage of the QSBS exclusion. However, this may involve a reorganization and should be undertaken only after consulting with experts in these types of transactions. 

Interested in learning more? Our professional portfolio managers and trust officers are local, so they’re available to meet with you.

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About Sandy Spring Trust
Sandy Spring Trust is proud to provide clients with solutions tailored to their specific needs and goals. We take the long view, using a strategic allocation discipline to help clients achieve long-term goals. As a fiduciary, we are interested not in selling a particular product, but in being a financial partner for retirement, estate planning, investments and much more. 

Sources: 
https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section1202&num=0&edition=prelim
https://www.floridabar.org/the-florida-bar-journal/internal-revenue-code-%C2%A71202-and-you-analyzing-exclusion-of-gain-on-sales-of-small-business-stock/ 
https://news.bloomberglaw.com/tax-insights-and-commentary/irs-offers-a-silver-lining-for-qualified-small-business-stock 
https://www.jdsupra.com/legalnews/section-1202-and-qsbs-an-often-84548/ 

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    Sandy Spring Trust is a division of Sandy Spring Bank, Member FDIC. This material is provided solely for educational purposes by Sandy Spring Bank, and is not intended to constitute tax, legal or accounting advice, or a recommendation for any investment strategy or transaction. You should consult your own legal, accounting, tax advisers, and/or portfolio manager regarding your specific situation and needs. Our staff will work closely with your advisers to coordinate your overall plan. Sandy Spring Trust and the SSB logo are registered trademarks of Sandy Spring Bank.