Qualified Small Business Stock

Qualified Small Business Stock (QSBS) is a tax incentive to drive the investment and founding of small businesses in the United States of America. The QSBS regulations are under U.S. Code Section 1202 of the Internal Revenue Code (IRC). QSBS is a tax exemption on a federal, and in some cases, a state level. The tax benefit can exclude up to 100% of capital gains on the sale of QSBS held for five years. The tax exemption allows savings up to the greater of $10 million or 10x the shareholder's basis in their stock (i.e. initial investment in the company). History of QSBS QSBS was first enacted in August 1993. Expansion and modification of these original aspects of QSBS legislations have occurred over the years to further motivate taxpayers to invest in, or even create, certain types of small businesses to boost job creation and to prevent economic recession. Over the decades, several legislative events have contributed to investor interest in the QSBS Section 1202 capital gains tax exclusion: 1993 – P.L 103-66 Section 1202 Passed August 10, 1993, the Public Law No. 103-66 Title VIII Part II Subpart B – Capital Gains Provision was passed by the House of Representatives Budget Committee and added to the Internal Revenue Code (IRC) as Section 1202.4. It was introduced by Martin Olav Sabo of the Minnesota House of Representatives. Section 1202 provided investors a 50% tax exclusion on capital gains up to the greater of $10M or 10x the taxpayer's basis. The capital gains rate was 28% at the time, and therefore QSBS provided up to a 14% tax savings.