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Tax Blog

Small Business Investment, Big Tax Benefits

Investing in a promising small business as it is getting off the ground has made many investors millions, but a lesser known aspect of small business investing is that oftentimes you can completely avoid paying federal taxes on these investments. A tax code provision regulating Qualified Small Business Stock (QSBS) allows for tax-free investments in certain small businesses.

There are a few stipulations to keep in mind if when utilizing this provision. Firstly, in order to qualify as QSBS, the company must be a C corporation. The company must also be engaged in a qualified business or trade, which unfortunately excludes a number of fields including health, law, engineering, architecture and financial services. One prominent field that does usually qualify for this provision is technology, and there are no shortage of promising tech startups looking for cash wherever they can find it.

There are a couple other rules to keep in mind. The stock must have been issued after August 10, 1993 and received after September 2010, must have been acquired directly from the issuing corporation or its underwriter, and the qualifying stock must be held for more than five years. Additionally, the provision only applies to investors in companies that have gross assets valued at no more than $50 million at the time the investment is made, meaning that there is some considerable leeway taken with the definition of “small” with this provision. It’s also important to note that the company’s gross assets can exceed $50 million after a person acquires shares.

If these conditions are met, investors will most likely qualify for a 100 percent exclusion and be able to completely write off federal taxes on the first $10 million or 10 times the basis of the investment, whichever is greater. So if you want to save millions in taxes while also potentially striking gold with the next Google or Amazon, get in while they are still in the garage for some serious benefits.

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