QSBS Tax Exemption

A tax strategy using QSBS (Qualified Small Business Stock) that can save millions in taxes when selling a business.

QSBS Tax Benefits

• 0% federal taxes on first $10 million of gains
• Can save approximately $2 million in federal taxes
• Still need to pay state taxes (13% in California)

Deal Structure Requirements

• Must be structured as a stock deal (not asset sale)
• Business needs to qualify for QSBS status
• No earn-out provisions preferred

Cash Optimization Strategy

• Include company cash in purchase price
• Buyer puts 1x multiple on cash in bank
• Benefits vs traditional approach:
  • Normal approach: Cash dividended to shareholders at 40% tax
  • QSBS approach: Cash included in purchase price qualifies for 0% federal tax rate

Example Transaction Structure

• Had $2M cash on hand
• Added cash to agreed purchase price
• Structured as all-cash transaction
• Used stock purchase agreement
• Quick 90-day transition period

Key Takeaway

• If selling a business, investigate QSBS qualification
• Can result in significant tax savings ($1.5M-2M range)
• Structure matters - proper deal structure required to capture benefits