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QSBS & Tax Planning Services

Experience adds up in planning strategies.

Code Section 1202 provides each taxpayer (stockholder) with an unmatched opportunity to exclude at least $10 million of gain (or perhaps substantially more under a 10X contribution gain exclusion cap) from taxes when qualified small business stock (QSBS) is sold if all eligibility requirements have been met. Our QSBS team focuses on maximizing each client’s gain exclusion allowable under Section 1202.

Our work spans the entire spectrum of QSBS and tax planning issues, from the choice of entity decision through the M&A process and beyond. If it involves QSBS sales proceeds, we assist with the planning and implementation of a Section 1045 rollover. Finally, when clients face a potential IRS audit, we help gather the documentation necessary to establish they have met Section 1202’s eligibility requirements.

How We Help Clients

Our QSBS and tax planning team works closely with founders, management and investors who are making an initial choice of entity decision in connection with the issuance of QSBS. We help clients vet their eligibility to claim Section 1202’s gain exclusion (before or after a sale of QSBS) and also navigate companies, shareholders, and private equity funds through the M&A sales process, structuring each transaction to optimize their QSBS benefits.

Below are additional QSBS-related services and projects regularly handled by our team:

  • Assisting clients making choice of entity decision (e.g., should I operate my business through a C corporation looking down the road to claiming Section 1202’s gain exclusion?).
  • Assisting clients who are converting LLCs/LPs taxed as partnerships into C corporations.
  • Dealing with the problem of mixing S corporations and QSBS, including restructuring an S corporation’s assets using a tax-free Type F reorganization, prior to making the S corporation a stockholder of a new C corporation that issues QSBS.
  • Issuing written tax opinions addressing various QSBS-related issues, including eligibility to claim Section 1202’s gain exclusion and reinvesting QSBS sales proceeds under Section 1045.
  • Advising founders, venture capital funds and family offices with respect to their QSBS eligibility and documentation requirements.
  • Handling the restructuring of businesses with QSBS in mind.
  • Assisting clients with respect to the intersection between Section 1202 and equity compensation planning, including issuing various types of equity and equity rights (e.g., restricted stock, convertible debt and SAFEs).
  • Advising family offices and private equity funds in connection with M&A transactions, including the nuances of equity rollovers involving QSBS.
  • Assisting companies who are working through their QSBS-related communications with investors, including providing certificates or information copies of opinions.
  • Advising stockholders with respect to how to maximize their Section 1202 gain exclusion amounts.
  • Dealing with difficult Section 1202 eligibility issues and associated planning.
  • Assisting with all aspects of reinvesting QSBS sales proceeds into replacement QSBS under Section 1045.
  • Advising clients with respect to documenting their QSBS-related return positions.
  • Advising with respect to how carried interests mesh with QSBS.
  • Assisting investment funds and investors with plans for holding QSBS through pass-thru entities (LLCs/LPs).

Key QSBS Contacts

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Scott W. Dolson

Partner

Louisville, KY

502.568.0203 Email
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Brian S. Masterson

Office Partner-in-Charge

Nashville, TN

615.251.5588 Email
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QSBS & Tax Planning Explained

Brush up on QSBS fundamentals or dive into the nuances of conversions, recapitalizations, and stock splits involving QSBS. Browse our QSBS collection below!

QSBS Fundamentals

Qualified small business stock (QSBS) offers a significant tax advantage through Section 1202, allowing non-corporate stockholders to potentially exclude 100% of capital gains (for stock acquired after September 27, 2010) upon the sale of QSBS held for more than five years, with a minimum $10 million gain exclusion or ten times the taxpayer’s basis, whichever is greater.

To qualify as QSBS, the stock must be issued by a domestic C corporation acquired directly from the corporation for money, property, or services, and the corporation must have met the $50 million aggregate gross assets test both before and immediately after the stock issuance.

Furthermore, the corporation must be actively engaged in a qualified trade or business, and the stockholder must not have held any offsetting short positions during the first five years of ownership, nor have been subject to anti-churning redemption restrictions related to stock redemptions by the issuing corporation.

Explore related QSBS resources and articles below. 

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Advanced QSBS Planning

Advanced QSBS planning involves sophisticated strategies to maximize the substantial gain exclusion offered by Section 1202 beyond the basic eligibility requirements. This includes proactive measures taken throughout a company’s lifecycle, from carefully choosing to operate as a C corporation from the outset, ensuring continuous compliance with the $50 million aggregate gross assets test through strategic timing of capital raises and asset management, and meticulous adherence to the active trade or business requirements.

Furthermore, advanced planning encompasses strategies for increasing the per-taxpayer gain exclusion cap through techniques like dividing ownership of QSBS among multiple taxpayers via gifting to family members or trusts (including DINGs and NINGs), and strategically selling QSBS over multiple tax years to leverage both the $10 million cap and the 10X basis cap. Navigating complex transactions such as mergers and acquisitions requires careful structuring to ensure a stock sale to preserve QSBS benefits, or utilizing Section 1045 rollovers to defer gain when selling before the five-year holding period.

Advanced planning also necessitates a deep understanding of the anti-churning rules surrounding stock redemptions in relation to QSBS issuances, especially in scenarios involving related persons or significant redemptions. Ultimately, effective advanced QSBS planning aims to optimize the potential for significant tax savings by proactively addressing eligibility requirements and strategically structuring ownership and transactions.

Explore our QSBS advanced planning resources and articles below. 

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Claiming Section 1202’s Gain Exclusion

Claiming the Section 1202 gain exclusion requires that a non-corporate taxpayer has held qualified small business stock (QSBS) for more than five years and that all eligibility requirements for both the stock and the issuing corporation have been continuously met. Upon a taxable sale or exchange of the QSBS, the taxpayer can exclude from gross income the lesser of the realized gain or the per-taxpayer per-issuer gain exclusion cap, which is the greater of $10 million (reduced by prior Section 1202 exclusions from the same issuer) or 10 times the taxpayer’s aggregate adjusted basis in the QSBS sold during the year.

It is crucial to note that the gain must arise from a sale or exchange, meaning that amounts treated as dividends or compensation income are not eligible for the Section 1202 gain exclusion, even if they relate to QSBS. Careful attention to the structure of any transaction involving QSBS, including sales, redemptions, and liquidations, is necessary to ensure the gain qualifies for this significant tax benefit.

Explore our QSBS collection below to learn how to claim/maximize Section 1202’s gain exclusion. 

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Section 1045 Rollover Planning

Section 1045 rollover planning provides a valuable mechanism for stockholders who sell their qualified small business stock (QSBS) before meeting the five-year holding period requirement to still potentially benefit from Section 1202’s gain exclusion in the future. Stockholders contemplating a rollover under Section 1045 can reinvest the proceeds from the sale of original QSBS into replacement QSBS on a tax-deferred basis if the reinvestment occurs within a 60-day period beginning on the date of the original QSBS sale. The corporation issuing the replacement QSBS must meet Section 1202’s active business requirements for at least six months after issuing the replacement QSBS.

Importantly, the holding period of the original QSBS is tacked onto the holding period of the replacement QSBS, allowing the stockholder to eventually meet the more-than-five-year holding period needed to claim the Section 1202 gain exclusion upon the sale of the replacement QSBS. This strategy allows stockholders to defer capital gains taxes and maintain the potential for future tax savings, even if an earlier sale of their QSBS becomes necessary.

Explore our Section 1045 rollover planning resources and articles below. 

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