Guide to Qualified Small Business Stock (QSBS)

Small businesses are the backbone of the American economy, but in Utah, they are so much more. According to U.S. Small Business Administration, over 99 percent of Utah businesses are small companies, employing almost 607,000 Utahns, or over 45 percent of workers in the state.

Although many small businesses do not flourish, investing in one that is successful can come with high returns and tax benefits that might justify the risk, especially if the company falls under the qualified small business stock exclusion (QSBS).

What Is Qualified Small Business Stock?

Qualified small business stock exclusion (QSBS) is a tax exclusion accessible to some small businesses and startups in Utah. Under this exclusion, income earned from a small business’s sales is exempt from federal taxation for at least five years, or in some cases, indefinitely. Also known as Section 1202 stock, QSBS authorizes shareholders of qualified small businesses to exclude a portion of capital gains when trading stock shares held for at least five years.

For stockholders who invest in small businesses, the benefits of a QSBS can be enormous. Depending on the circumstances, up to fifty percent of the federal income tax owed on gains from your gross income could be written off.

Who Can Take Advantage of QSBS Exclusions in Utah?

Federal guidelines only permit qualified small business stockholders to take advantage of this exclusion if they meet the following qualifications:

  • The stock is from an established domestic C-Corp
  • The corporation had less than $50 million in assets when the stock was issued
  • The stock was acquired at its original issue and not from a secondary market
  • At least 80% of the company’s assets were used in the active conduct of one or more qualified businesses during the time you owned the stock

The last factor is typically the most difficult to define as the phrase “active conduct” is used to stress that the corporation cannot be an investment channel or sedentary business. In addition, only certain types of small businesses satisfy the criteria for QSBS, and stock from the following types of companies is ineligible:

  • Farms
  • Financial services, such as banks and investment companies
  • Hotels and motels
  • Mining and mineral extraction companies
  • Real estate businesses
  • Restaurants
  • Professional service companies, including:
    • Accounting
    • Actuarial science
    • Architecture
    • Consulting
    • Engineering
    • Health care
    • Law
    • Performing arts

Small businesses in industries such as technology, wholesale or retail and manufacturing generally will qualify for QSBS.

QSBS is usually owned by investors and employees of small businesses in Utah. If you are a small business owner, employee, or investor in Utah, discuss your business endeavors and rights with a lawyer who understands the life of the entrepreneur.

Cardon Law has focused on representing entrepreneurs and small business investors in Utah for more than 15 years. Business Attorney Jeffrey Cardon is practiced in tailoring legal solutions to the unique needs of his clients.

To schedule a meeting with Attorney Jeffrey Cardon, call (801) 225-6700 or contact the Cardon Law office online.