Latest news with #QSBS
Business Times
6 hours ago
- Business
- Business Times
Wealthy Silicon Valley investors in line for US$17 billion windfall in US senate Republican tax Bill
[NEW YORK] Silicon Valley's favourite tax break may be getting an upgrade. Venture capitalists, along with successful tech founders and early startup employees, already pay no taxes on billions of US dollars of gains annually, thanks to a lucrative and complicated provision called Qualified Small Business Stock, or QSBS. Now the carve-out could get even more generous in changes included in Senate Republicans' proposed tax and spending Bill moving through Congress. The once-obscure provision is the subject of 'every dinner conversation in Silicon Valley,' said Christopher Karachale, a partner at law firm Hanson Bridgett in San Francisco. 'It's already an exceptional benefit for people who take risks on startups.' Taxpayers claimed US$51 billion of QSBS gains in 2021, a record year for venture capital deal activity, according to a Treasury paper earlier this year, with the benefits skewed to a select group. While about 33,000 people reported QSBS to the Internal Revenue Service annually over the decade studied by Treasury, 90 per cent of the total income went to individuals reporting more than US$1 million of gains on eligible stocks. Shares qualify as QSBS if they're acquired early enough in a startup's life cycle and held for more than five years. Once sold, capital gains aren't taxed up to certain limits, which advisers to the wealthy have figured out how to stretch and multiply several-fold. With the right planning, a venture capital investor or founder can end up with hundreds of millions of US dollars of tax-free income. Now the QSBS break could get even better. Though it was not addressed in previous versions of US President Donald Trump's 'One Big Beautiful Bill,' Senate Republicans slipped into their version tweaks relaxing its complex rules. Taxpayers would be able to invest at later stages in startups and still get QSBS, cash out earlier and still get a partial benefit, and skip taxes entirely on up to 50 per cent more of their windfalls. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up 'I'm surprised' Critics say the QSBS provision is unnecessary and overly expensive. House Democrats proposed restricting the tax break in 2021. 'I'm surprised they're not killing this thing, but I guess the lobbyists did their work,' said Manoj Viswanathan, a professor at the University of California Law San Francisco who has studied QSBS. 'I just don't think it's worth it.' The Treasury projects the current QSBS break will cost the US$44.6 billion over the decade beginning in 2025. The Senate bill's proposed changes would boost that by another US$17.2 billion over that period, the Joint Committee on Taxation estimates. Defenders of the provision have spent several years pushing Congress to expand it, arguing it encourages innovation and risk-taking. 'It brings more capital off the bench and into the game that might otherwise go to different asset classes,' said Patrick Gouhin, chief executive officer of the Angel Capital Association. 'QSBS encourages long-term investment in high-growth startups across the country by lowering the cost of capital,' Bobby Franklin, president and CEO of the National Venture Capital Association, said in a statement. 'It tells investors and founders alike: building something new in America is still worth it.' Despite the name Qualified Small Business Stock, the vast majority of small businesses are not eligible. Only C-corporations issue stock that qualifies as QSBS. Service industries are generally excluded, and the break is most valuable for technology or biotech that can grow quickly and generate large capital gains. The Senate proposal would be a potential boon to investors in artificial intelligence and other hot areas. 'Stacking' strategy To qualify under current law, taxpayers must have obtained their shares in a C-corporation at an early stage, when it had less than US$50 million of gross assets, an accounting definition often significantly less than its valuation. People who hold QSBS for at least five years can avoid taxes on up to US$10 million of capital gains or 10 times their initial investment, whichever is more. An early investor who puts US$30 million into a startup, therefore, can theoretically receive US$300 million tax-free. Founders can maximise their initial basis, and thus their potential QSBS-eligible gains, by transferring intellectual property into a startup from a predecessor company. Through a process called 'stacking,' QSBS holders can multiply the benefits of the US$10 million exclusion as well. 'It's the biggest game in town,' Brian Gray, a partner at accounting firm Gursey Schneider in Los Angeles, said of the strategy. His clients typically set up six or seven trusts, each benefiting a different family member, to get up to US$60 million or US$70 million in tax-free gains rather than just US$10 million. Senate Republican lawmakers would turbo-charge those benefits. They would set a US$75 million limit on an eligible startup's gross assets, up from US$50 million, on QSBS issued after the bill is enacted. Maximum tax-free gains would jump to US$15 million, from US$10 million. Both limits would be adjusted for inflation starting in 2027. The bill would also make it easier for QSBS holders to exit their investments sooner than five years without forfeiting tax benefits, allowing them to exclude half their gain after three years and 75 per cent after four years. That will be valuable to serial entrepreneurs, according to Gouhin of the Angel Capital Association. 'This gives you an added incentive to turn that company as quickly as possible.' BLOOMBERG
Gizmodo
9 hours ago
- Business
- Gizmodo
Silicon Valley Is Cashing Its Check After Backing Trump
The cost of living is increasing, wages for workers are stagnant, and people are looking for a break. Silicon Valley is getting one instead. According to Bloomberg, a little-known tax benefit known as the Qualified Small Business Stock (QSBS) that has become a favorite carve-out of tech startups would get expanded under a spending bill proposed by Republicans in the Senate and could potentially put more than $17 billion back in the coffers of Silicon Valley execs. The QSBS provision is a tax exemption that applies to the stock of qualified small businesses like certain tech startups. The rule allows shareholders in one of these businesses to sell or exchange their stock while being exempted from some or all of the capital gains tax that they would otherwise have to pay on those sales. The specifics are a bit complex, but currently, it is set up to allow early-stage investors to benefit if they hold onto their shares for five years. The proposed changes to the rule, per Bloomberg, would expand the benefit considerably. A provision slipped into the so-called 'One Big Beautiful Bill' would allow investors to come in later, cash out earlier, and still score a nice chunk of cash-free income off their investment. According to data from the Department of the Treasury, about 33,000 people have claimed the QSBS benefit in the last decade. They netted $51 billion in 2021 alone from it, which was a record year. Notably, the Treasury also found that 90% of the income claimed through QSBS came from taxpayers who were reporting more than $1 million of gains—basically, folks who are cashing out big time without paying anywhere near what an average person has to hand over to the federal government. The Treasury Department projects that the QSBS provision will keep about $44.6 billion from being taxed from 2025 to 2030. If the Republicans' proposal moves forward, that would add another projected $17.2 billion in revenue that doesn't come back to the government over that period, according to data provided by the Congressional Joint Committee on Taxation. According to The Guardian, Silicon Valley executives and employees poured about $394 million into Donald Trump's 2024 election campaign. So scoring $17.2 billion in tax breaks certainly seems worth the spend. That's a cool 4,265% return on investment! For what it's worth, Democratic lawmakers proposed significantly rolling back the QSBS rules back in 2021, in a way that would have slashed the amount of income that could be excluded from taxes in half. Instead, the rich get richer.
Bloomberg
15 hours ago
- Business
- Bloomberg
Wealthy Silicon Valley Investors In Line for $17 Billion Windfall in GOP Tax Bill
Silicon Valley's favorite tax break may be getting an upgrade. Venture capitalists, along with successful tech founders and early startup employees, already pay no taxes on billions of dollars of gains annually, thanks to a lucrative and complicated provision called Qualified Small Business Stock, or QSBS. Now the carve-out could get even more generous in changes included in Senate Republicans' proposed tax and spending bill moving through Congress.
Forbes
09-06-2025
- Business
- Forbes
Maximize QSBS Windfalls By Selling Startup Stock Tax-Free
For founders and early employees at startups, qualified small business stock (also called QSBS or ... More Section 1202) is the best tax break you'll find. If criteria is met, individuals can sell their shares tax free. As a founder, investor, or early employee at a startup or small business, qualified small business stock is perhaps the best tax break you never heard of. When criteria is met, qualified small business stock (also called QSBS or referred to as IRC Code Section 1202) enables individuals to sell their shares tax free. Yet even with qualifying stock, hurdles remain. First, taxpayers may not know about QSBS! And second, mergers and acquisitions can threaten shareholders' ability to sell shares tax-free. Here are tips and strategies from a financial and tax advisor on ways to maximize the benefits of qualified small business stock. This article provides information for informational purposes only and should not be misinterpreted as personalized advice of any kind or used as the basis for making any type of tax, financial, legal, or investment decision. There are several requirements for shares to be eligible for Section 1202. Typically, qualifying hinges on these key factors: This article has more on the QSBS stock qualification rules. But again, note: even if you currently have QSBS-eligible (or future eligible) shares, certain activities, such as acquisitions or share buybacks, could jeopardize your ability to claim tax-free tax treatment. Qualifying sales offer an annual gain exclusion equaling the greater of: Additional benefit: the QSBS rules and limits apply on a per-issuer basis. In other words, serial entrepreneurs and taxpayers engaging in proactive wealth planning strategies may be able to maximize their savings well beyond $10 million. Being able to exclude 100% of the gain from sales of startup stock is an immense tax benefit. But unfortunately, employees may miss out if they don't have the right professional team in place or resources at work. As a wealth advisor specializing in stock options, I've seen firsthand how crucial an experienced, collaborative team is for positive client outcomes. One key collaborator is Jeff Krueger, CPA, a tax advisor with Seaport Financial Partners in Boston, MA, who also supports founders and employees with equity compensation. He says a key success factor is how well a company educates employees on qualified small business stock and potential employee eligibility. However, even if the company does provide valuable education and general resources, shareholders should strongly consider engaging their own team of experienced financial, legal, and tax advisors for personal advice. On the individual side, we both agree one of the biggest mistakes people make with QSBS is not exercising stock options early enough. Krueger says founders also set up the company wrong (e.g. not as a C Corporation), but that can be fixed if the mistake is caught early enough. Finding out you may eventually have QSBS is just the first step. A lot needs to go right between a shareholder's initial eligibility and a resulting (qualifying) stock sale. It's like the early Super Mario Bros. video games. In any level, you could collect extra coins or escape danger with power-ups, but make the wrong move and it's game over. Thankfully, like the video game, nothing in section 1202 will actually harm you in real life. But there are things that can kill your eligibility to sell stock tax-free. The vast majority of successful startups will exit via acquisition versus a traditional IPO. But what happens if you haven't met the five-year holding period yet or the deal includes stock of the buyer? Depending on the terms of the deal and goals of major shareholders, there may be some unique planning opportunities. There are many other factors to consider and ways to structure a sale, but here are two ways new founders could extend their 1202 runway during an acquisition. Sometimes, a deal is too good to pass up. But what happens if you haven't held the QSBS shares for at least five years? Krueger says a tax-free rollover into replacement QSBS under Section 1045 may be an option to consider. He says serial entrepreneurs often use QSBS rollovers to defer taxes and extend the holding period to reach the five-year requirement. At a high level, under Section 1045, investors can tack their original QSBS holding period onto replacement stock by reinvesting in a company that currently meets the criteria for qualified small business stock within 60 days. Although finding replacement QSBS can be challenging, this route can also provide greater flexibility for shareholders in determining how much to defer and in which investment. Deferred gains reduce cost basis in the replacement QSBS. If the rollover stock is later sold meeting the requirements of Section 1202, it may be fully tax-free subject to the limits. Otherwise, the taxpayer would pay tax at capital gains tax rates or could consider another 1045 QSBS reinvestment. Another way to tack onto the holding period of original QSBS is through a Section 351 exchange or Section 368 reorganization. These options also have the potential to retain the tax benefits of Section 1202 and provide for tax-deferral (full or partial) when the buyout is complete. Krueger says these moves must be considered by the deal team, which includes the corporate lawyers and accountants. It's not uncommon for company acquisitions to require a certain amount of rollover equity, particularly for founders and key shareholders. But essentially, when done properly and all the facts align, these avenues have the potential to preserve the whole gain exclusion under Section 1202 if the buyer's stock is QSBS. If it isn't, the exclusion can still apply when shares are ultimately sold, but only on the gain that was deferred at the time of exchange. M&A transactions are very complex and require the support of corporate and personal advisors. As you discuss your options with your team, don't lose sight of the bird in hand. Krueger recalls a client missing tax-free QSBS treatment by only six months due to the timing of an acquisition. Yet even in hindsight, the client likely made the right decision. He notes that planning can cut both ways — had the client delayed six months, they would have been dealing with tariffs, and perhaps the deal would have fallen through altogether. Similar issues can arise with tax-free QSBS rollovers and exchanges. Businesses fail every day. Repealing the rules for qualified small business stock has been a longstanding topic in Congress. The timeline to liquidity is unknown and there are still a number of ways for a gain exclusion to be invalidated along the way. As with most things in personal finance and investing, the key is making an informed decision and prioritizing when you can control. Another advanced planning technique to maximize the tax-free sales of qualified small business stock can be by gifting QSBS outright to children or family, or more commonly, using trusts for additional control, creditor protection, and other benefits. As stated earlier, the limit on qualifying sales of Section 1202 stock is generally capped at $10 million per taxpayer. So with this strategy, shares of QSBS can be put into trusts for different taxpayer beneficiaries. Krueger recently had a client set up three different trusts, for their children and a parent, which are projected to extract $40 million in tax-free value after considering the client's ownership. However, despite the tax benefits, this approach requires careful planning and support from a trust and estate attorney. For example, the trusts need to be set up strategically and correctly. The original founder/shareholder must also ensure they can support their lifestyle and income needs if they effectively give away these assets for the benefit of others. Gifting and trust stacking can also become much more difficult after the company has met success, given the lifetime gifting limits. Thankfully, most state tax laws conform to the federal QSBS rules. But, there are notable exceptions, such as California. Krueger says to discuss your situation with your tax advisor because if you're willing to relocate, moving to a QSBS-friendly state before selling can be beneficial. Generally, he says even if stock options were exercised in a non-conforming state, state income taxes are typically assessed only by the taxpayer's current state of residence upon sale, provided the one-year-and-one-day investment income holding period is met. Cementing the massive tax benefits of qualified small business stock may ultimately come down to the very pedestrian issue of paperwork and the multiyear retention of those documents. It is up to the stockholder to maintain documentation to substantiate their eligibility for QSBS in the event of an IRS audit. At the very least, Krueger suggests getting records of: Ideally, he says a company will get an opinion letter after reaching the $50 million asset threshold, perhaps from a Big 4 accounting firm, and distribute that to employees at some point. Additional recordkeeping items that can be helpful include a QSBS eligibility checklist (signed by CFO) or the corporate tax returns aligning with stock purchases. As with anything in the tax code, qualified small business stock is complicated, particularly when considering ways to get the most out of tax-free sales. The most lucrative planning strategies are typically the ones done early. So if you have QSBS, or think you might, don't delay taking steps to get your professional team together. For founders and business owners, proactive employee communications and education can help deepen loyalty, align incentives, and even streamline efforts for leadership though consolidated messaging and outside resources. For example, consider hosting an educational session for employees led by an independent wealth advisor and Certified Public Accountant. Wherever you are in your QSBS journey, make sure you have the right team in place and fully understand options in planning and when navigating change. After all, $10 million tax benefits don't come around too often.
