QSBS Tax Shield
Share
A tax strategy called QSBS (Qualified Small Business Stock) allows founders and investors to potentially save millions in capital gains taxes when selling their company. Here's how it works.
QSBS Overview
- Protects up to $10M or 10x your initial investment from capital gains taxes (whichever is greater)
- Requires 5-year holding period of stock
- Company must be a C-Corp valued at $50M or less when stock is issued
- Applies at federal level and many states honor it (except California)
- Could potentially walk away paying $0 in taxes on a $10M exit
How to Maximize QSBS Benefits
- Can stack QSBS shields through multiple tax returns:
- Create trusts for kids and give them equity
- Each trust gets its own $10M exclusion
- Can potentially shield $40-50M using family trusts
Key Considerations
- Must properly value company when converting from LLC to C-Corp
- Requires third party valuation
- Higher initial valuation = higher potential tax shield (10x that amount)
- Time sensitive requirements:
- Must hold stock for 5 years
- Need to file proper documentation when acquiring shares
Important Notes
- Currently one of the best tax savings strategies available
- Better than real estate tax advantages because:
- Not just a deferral but complete exclusion
- Can potentially eliminate taxes completely vs just deferring
- May not last forever:
- Was up for potential changes 2 years ago
- Could be reduced to 50% exclusion in future
- Not as permanent as real estate tax benefits
Common Mistakes
- Not being aware of QSBS when structuring company
- Missing filing deadlines
- Improper documentation
- Not maximizing valuation opportunities
- Failing to consider trust strategies for family members
Sam Parr
Host of MFM and fitness influencer
Sam Parr is a serial entrepreneur and business media pioneer.
In 2016, he founded The Hustle, a business news media company that started in his kitchen with just $12 and grew to eight figures in revenue.
Sam led the charge in making newsletters popular when few believed in their potential.
After four successful years, he sold The Hustle to HubSpot, a publicly traded company. Now operating as HubSpot Media, The Hustle reaches 3 million readers daily, employs a team of nearly 100, and has been the launchpad for dozens of its staff to found their own media companies and newsletters.
Sam remains the host of the popular business podcast, My First Million, and continues to start and sell companies. He also co-founded Hampton, a highly vetted community for entrepreneurs, founders, and CEOs, and teaches people to write better through his platform, Copy That.