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Qualified Small Business Corporation (QSBC) Benefits

Operating your small business as a Qualified Small Business Corporation (QSBC) could be a smart idea, tax-wise that is.

Under Section 1202 of the Internal Revenue Code, operating as a Qualified Small Business Corporation (QSBC) offers unique tax benefits. QSBCs are essentially treated the same as a regular C corporation for tax and legal purposes, with an exception regarding its shareholders. Shareholders of QSBCs can potentially exclude 100% of their gains from the sale of QSBC stock from federal income tax yielding to a 0% federal income tax rate on profits from the sale of the QSBC stock.

To qualify for this tax benefit, shareholders must meet several requirements outlined in Section 1202 of the Internal Revenue Code. These requirements involve factors such as the size and nature of the business, the duration of ownership of the stock, and other specific criteria. To be eligible for the 100% stock sale gain exclusion deal, you must hold your QSBC shares for over five years. For shares that haven’t yet been issued, the 100% gain exclusion break will only be available for sales that occur sometime in 2029 or beyond.

Additionally, the 100% federal income tax gain exclusion is only available for sales of QSBC shares that were acquired on or after September 28, 2010. Do note, the tax benefit isn’t available for QSBC shares owned by another C corporation. However, QSBC shares held by individuals, LLCs, partnerships, and S corporations are potentially eligible.

If you currently operate as a sole proprietorship, single-member LLC treated as a sole proprietorship, partnership or multi-member LLC treated as a partnership, you’ll have to incorporate the business and issue yourself shares to attain QSBC status - a process in which your VAAS Pro Consultant can help you with.

Lastly, the corporation’s gross assets can’t exceed $50 million immediately after your shares are issued. If after the stock is issued, the corporation grows and exceeds the $50 million threshold, it won’t lose its QSBC status for that reason.

Businesses that Aren't Eligible

  1. Health Services

  2. Law Services

  3. Engineering

  4. Architecture

  5. Accounting Services

  6. Actuarial Science

  7. Performing Arts

  8. Consulting

  9. Athletics

  10. Financial Services

  11. Brokerage Services

  12. Banking

  13. Insurance

  14. Leasing

  15. Financing

  16. Investing

  17. Farming

  18. Oil Production or Extraction

  19. Hotel or Motel Business

  20. Restaurant

  21. Natural Gas or other Minerals in which percentage depletion deductions are allowed

  22. Businesses where the principal asset is the reputation or skill of its employees

Other Key Things to Note

The Tax Cuts and Jobs Act made a flat 21% corporate federal income tax rate permanent. So, if you own shares in a profitable QSBC and you eventually sell them when you’re eligible for the 100% gain exclusion break, the 21% corporate rate could be all the income tax that’s ever owed to the IRS.

The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are two strong incentives for eligible small businesses to operate as QSBCs. We’ve summarized the most important eligibility rules here, but there are more. So before making your decision to operate your business as a QSBC, schedule an appointment to consult with us.


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