We spend most of our time trying to reduce losses and increase gains, but we spend little time and attention on the second two items. This is short-sighted given the fact that both taxes and fees are much more clearly manageable.
As we head toward the end of the year, its critical to consider tax strategies to optimize your long-term plans. Investment and expenses made on January 1 or after might have had benefits if completed in the 2023 calendar year.
While we have discussed the QSBS tax benefit over the last several years, it cannot be emphasized enough. It has significant potential benefits.
QSBS allows eligible investors to exclude a portion of their capital gains from the sale of qualified small business stock from federal taxation.
Here are some key points about QSBS:
Eligibility Criteria: To qualify for QSBS treatment, the stock must be issued by a qualified small business (as defined by the Internal Revenue Code) and meet certain other criteria. The business should be engaged in an active trade or business, and its gross assets must not exceed $50M at the time of stock issuance. In other words, you may not be able to take advantage of QSBS with a later stage startup.
Gains Exclusion: If the requirements are met, investors may be eligible to exclude a percentage of their capital gains from the sale or exchange of QSBS from federal income tax. The exclusion percentage can be as high as 100%, meaning that the entire gain from the sale may be excluded from taxation.
Holding Period: Investors typically need to hold the qualified small business stock for a minimum period (usually five years) to qualify for the capital gains exclusion. This is aimed at encouraging long-term investment in small businesses.
Annual Limitations: There are limitations on the amount of gain that can be excluded under QSBS. For example, the exclusion is generally limited to the greater of $10M or ten times the investor’s basis in the QSBS.
As mentioned, optimizing investments and tax strategies towards the end of the year is crucial. Investors should consult with tax professionals to ensure they meet all the requirements for QSBS and to incorporate it effectively into their overall investment and tax planning strategies.
In this series we will do a review of Opportunity Zones, write-downs and a few other tools that might be part of your tax planning.