Meaning
Federal tax codes designate specific shares issued by domestic corporations as eligible for large capital gains exclusions upon their eventual sale. To qualify as qualified small business stock, the underlying entity must meet strict asset size limits at the time of issuance. The shares must be acquired at original issue in exchange for cash or physical property.
Holding Constraint
Investors must maintain their position for at least five years to claim the tax benefit.
Asset Limit
The gross assets of the corporation cannot exceed fifty million dollars before or immediately after the stock is issued. Once a company grows beyond this size, new shares no longer receive the designation. The boundary defines which entities can offer the incentive to early employees and founders.
Measurements rely strictly on the tax basis of the assets.
Gain Exclusion
Eligible taxpayers can exclude up to one hundred percent of the gain from their taxable income. The total amount of the exclusion is capped at ten million dollars or ten times the basis of the stock. This provision increases the after tax proceeds from a successful exit.
A founder who meets all criteria can save millions in taxes upon the sale of their firm.
