Powering Up QSBS Exclusions

Powering Up QSBS Exclusions

The power of utilizing the Qualified Small Business Stock (QSBS) exemption cannot be overstated when it comes to strategic tax planning and wealth accumulation. By harnessing the QSBS exemption, investors have the opportunity to significantly reduce, and in some cases entirely eliminate, their capital gains tax liability.  With proper estate planning, you can multiply these benefits many times over.

What is Qualified Small Business Stock? QSBS refers to a specific tax incentive provided under Section 1202 of the Internal Revenue Code in the United States. QSBS is designed to encourage investment in small businesses by offering significant tax benefits to investors who hold eligible stock in qualified small businesses.

Key Requirements for QSBS:

1. Definition of Qualified Small Business: To be eligible for QSBS benefits, the issuing corporation must be a “qualified small business” at the time the stock is issued.  A qualified small business typically meets the following criteria:

  • It is a domestic C corporation (not an S corporation or LLC).
  • Its gross assets do not exceed $50 million both before and immediately after the stock issuance.
  • It must be engaged in an active business, with specific exclusion for certain types of businesses, such as service-based businesses.

2. Holding Period Requirement: To qualify for the tax benefits associated with QSBS, investors must hold the stock for at least five years.

If you happen to meet these requirements, the primary benefit of QSBS is the potential exclusion of a percentage of the capital gains realized upon the sale of the qualified stock. This exclusion percentage is 100% of the qualified gain if you acquired the stock after September 27, 2010.  If you acquired it before then, it will be either 50% or 75% depending on acquisition date.

The easiest way to understand the potential benefits of QSBS is by running through an example.

Scenario: Suppose you invested in QSBS by purchasing stock in a qualified small business that meets the QSBS criteria. After holding this investment for more than five years, you decide to sell the QSBS shares, resulting in a capital gain of $10 million with 100% exclusion.

Without QSBS: If you were subject to the long-term capital gains tax rate of 20% without the QSBS exclusion, you would owe $2 million in federal capital gains tax ($10 million x 20%).

With QSBS: In this hypothetical scenario with a 100% QSBS exclusion, you can exclude the entire $10 million capital gain from federal capital gains tax. This means you would owe zero federal capital gains tax on the $10 million gain. (You may still owe state income tax)

As you can see, in the scenario above, you could potentially save up to $2mm in capital gains tax by utilizing the QSBS exemption. 

Powering up through QSBS Trust Planning: Duplicating the benefits of the Qualified Small Business Stock (QSBS) exclusion through trusts for family members can be a complex but effective tax planning strategy. The idea is to leverage the QSBS exclusion for multiple family members while complying with relevant tax rules and regulations. Here’s how this can work:

  1. Multiple Trust for Multiple Family Members:
    • Establish separate trusts for each family member you wish to benefit from QSBS. These trusts should be irrevocable trusts, such as grantor-retained annuity trusts (GRATs) or intentionally defective grantor trusts (IDGTs), depending on your goals.
  2. Transfer QSBS into each trust:
    • Transfer QSBS shares into each trust. These shares should meet the QSBS criteria, including the five-year holding requirement.
    • A valuation of the shares will be required and you could also get the added benefit of a valuation discount upon transfer to the trust.
  3. QSBS Exclusion for each trust:
    • If each trust qualifies for the QSBS exclusion, each trust may be eligible to exclude a portion or all of the capital gains from federal capital gains tax when the QSBS shares are sold.
  4. Unique Terms for each trust:
    • Each trust can have its terms and beneficiaries. This flexibility allows you to tailor the trusts to your specific objectives, such as providing for different family members or generations.
  5. Compliance with tax rules:
    • Ensure that each trust complies with all relevant tax rules and regulations. This may involve careful structuring of the trusts, annual reporting, and adherence to IRS guidelines.
    • It’s crucial to work closely with tax professionals and legal advisors experienced in trust planning and QSBS to navigate the complexities and ensure compliance with tax laws.

Benefits: By duplicating the QSBS benefit across multiple family member trusts, you can potentially achieve several advantages:

  1. Maximize QSBS Exclusions: You can utilize the QSBS exclusion for each trust, potentially allowing multiple family members to exclude significant capital gains from federal capital gains tax.
  2. Wealth Transfer: This strategy can serve as a means of transferring wealth to multiple family members efficiently, allowing for a significant legacy or financial support.
  3. Estate Planning: Trusts can be a valuable component of your estate planning, enabling you to structure the distribution of assets according to your wishes and minimize estate tax liability.
  4. Tailored Planning: Each trust can be customized to the specific needs and goals of the family members it benefits.

It’s important to note that trust planning, especially involving tax-advantaged strategies like QSBS, can be intricate and should be approached with care. Tax laws and regulations may change over time, so it’s essential to stay informed and adapt your plan as needed. Consulting with professionals is critical to ensuring that your trust planning aligns with current laws and meets your family’s objectives.

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Waldron Private Wealth (“Company”) is an SEC registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information about the Firm’s registration status and business operations, please consult Waldron’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at

This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Due to various factors, including changing market conditions, aforementioned information may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee a profit or protect against loss. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice. 


About the Author

Eric Vogt works with corporate executives, highly compensated professionals, and inheritors of wealth to identify and assess personal and financial goals, leading to the development of customized planning strategies.

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