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The QSBS Tax Exemption: A Valuable Benefit for Startup Founders and Builders
- hackitup7 5y agoIncredibly important to know about for startup founders and early employees. QSBS is not applicable in California and a few others, and some states only partially conform: https://www.mossadams.com/articles/2021/04/qualified-small-business-stock-tax-benefits#:~:text=The%20good%20news%20is%20that,conform%20to%20federal%20QSBS%20rules https://www.mossadams.com/articles/2021/04/qualified-small-b....
- omarfarooq 5y agoA map that shows color coded QSBS conformity per U.S. state: https://www.qsbsexpert.com/how-does-my-state-treat-qsbs/ https://www.qsbsexpert.com/how-does-my-state-treat-qsbs/
- romanhn 5y agoTo be clear, this is just for the state tax exclusion. The 20% capital gains exclusion on federal taxes is applicable in all states.
- hackitup7 5y agoCorrect, should have been more clear on that.
- JumpCrisscross 5y ago> QSBS is not applicable in California and a few others, and some states only partially conform I also believe this is based on the state of residence. So a New Yorker working for a Delaware corporation headquartered in California is fine. (California's weird retroactive tax policies make moving to get this benefit tricky, however.)
- deleted 5y ago[deleted]
- modeless 5y agoThere are a lot of exclusions based on the type of business. No farming, banking, finance, insurance, hotels, restaurants, "or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees" such as doctors, accountants, consultants, etc. https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section1202&num=0&edition=prelim https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim...
- stevenicr 5y agoI'm considering a opening / franchising a new type of gaming-cafe - I wonder if that would be deemed a 'restaurant'.
- anonymouse008 5y agoFranchising is mostly IP and distribution depending ??
- LurkingPenguin 5y agoYou might want to consider separating the businesses, with the core IP you franchise held in a parent company. Any company-operated restaurants would be separate entities. Not a lawyer/accountant though, so as always, you should seek professional counsel.
- jiveturkey 5y agoDoes it matter for this purpose? I have a hard time imagining that your business raises capital and has an exit, where QSBS will come into play.
- lefstathiou 5y agoI would like to add that this exclusion is per person per company and can be multiplied with the use of irrevocable trusts. For example, you can set up trusts for your wife and two kids, put in shares, and all receive the qsbs exclusion. Definitely speak to accountants and lawyers before trying this at home.
- jiveturkey 5y agoIt is exceedingly difficult to spread the QSBS love like that. Not worth considering. You are venturing into theoretical territory.
- divbzero 5y agoOther resources I’ve found informative include this write-up about QSBS [1] and this deep dive into Section 1045 deferrals [2]. [1]: https://www.wsgr.com/en/insights/understanding-section-1202-the-qualified-small-business-stock-exemption.html https://www.wsgr.com/en/insights/understanding-section-1202-... [2]: https://frostbrowntodd.com/advanced-section-1045-planning/ https://frostbrowntodd.com/advanced-section-1045-planning/
- ruggeri 5y agoIn my opinion, an outrageous tax-giveaway to the rich. Very sad that this was expanded to 100% (from 50%) during the Obama administration. Some people will say it doesn't apply to California, but this misses the point: you still avoid federal income taxation (and AMT). California is simply smart enough (IMO) to not follow the federal government's lead on this. So yeah, you'll still have to pay some tax to California. Big whoop you just saved 28% of federal tax. The QSBS exemption is an excellent reason to remain a C corporation. Please don't ask how I know. If you are a founder, you should definitely study/inquire about the benefits of this exemption.
- agency 5y agoAs someone who stands to make a bunch of money from this exemption if things work out (I have a pile of qualifying stock from a YC top 50 unicorn), I agree. I think I would end up paying literally $0 in tax for no good reason (my state has no income tax).
- s17n 5y agoYeah qsbs is totally nuts but I'm not complaining.
- vmception 5y agoI mean you can also move to Puerto Rico for the majority of the year you sell and also have 0% capital gains for federal income tax (and PR tax) purposes, under act 60. It’s got to be your only US address though.
- 55555 5y agoI live abroad. Can I move to Puerto Rico so that it becomes my in-USA home and then go back abroad and live outside the US almost all of the year, and then pay 0% capital gains in the USA because my US tax home is Puerto Rico?
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- mrtweetyhack 5y agofuck the IRS
- anamax 5y agoHow does this compare to funding a company by buying its stock inside a Roth IRA? (Not withdrawing, treating the company as an investment.) Yes, there are penalties to withdrawing from a Roth before 55, so the profits are locked up for a while, but 0 state and federal income tax can be worth it. Many Roth custodians (Schwab) only allow public company stock, so it does require some work.
- sabalaba 5y agoYou can’t own 50% of more of a company you invest in using your self directed Roth IRA. So, QSBS is great for founders who own 50% or more.
- vmception 5y agoJust be your own custodian. Dont conflate the limitations of third party custodians with the actual law, which is way more flexible. You can move Roth Ira funds around willy nilly. You can have a literal stack of cash on your desk labeled Roth Ira and invest in almost anything. Its just the consumptive purchases that would be a problem. To your question, it is always better to have free and clear money with no restrictions, which means 0% tax now is better than locked up funds that you also wont have to pay taxes on in the future. Retirement products and trusts are judgement proof though sometimes even against ex spouses, not IRAs though), so if you have or expect to have creditors, better not to have assets in your name. Even better is to only have debt in your name so you can just tell people to get in line, or discourage them from ever bothering with the courts at all. Stuffing Roth IRAs are good for that.
- divbzero 5y agoAre there filing or record keeping requirements to being your own custodian? I imagine the process is somewhat more involved than labeling the stack of cash “Roth IRA”, or is it really that simple?
- redis_mlc 5y agoIt's generally that simple. You should have an excel you update annually and print the latest version each year and keep the printout in your records. As long as under the annual limit and it makes sense, you should be good. If you're trying to be fancy, search for more info on how Thiel setup the ultimate Roth. Also, note that a general strategy is to borrow against holdings, so you don't even need to sell the Roth to get access to it. (One of the reasons executives hate short sellers is that it screws with their loans if compensation share prices go down.)
- yepyepyep12 5y agoMany people here are grabbing their pitchforks about QSBS and how it makes the rich richer. QSBS has a maximum per year rule of $10M. That means you save 20% (Federal LTCG rate) on $10M/year --> $2M. That is not "making the rich richer", the person has to buy in a company worth less than $50M in value and hold it for 5+ years. This is a pretty rare case and helps people get into the single digit millions, not billions...
- spoonjim 5y agoLOL @ someone saving $2m on their taxes as "not rich."
- tarunupaday 5y agoQSBS allows way more than $2M/year of tax deduction. - 10M cap applies to per entity per year per transaction. so if 10 of my investments every year have gain of $10M each - I pay exactly ZERO DOLLARS in state and federal taxes on this $100 million income every year. - On top of it, If I make more than $10 million in a year on one transaction - there are ways to split this gain over multiple years (via deferred transactions) or over multiple entities (via trusts and LLCs) I know on good authority that most GPs in venture funds pay very little capital gains tax due to QSBS “loophole”.
- mcherm 5y ago> That is not "making the rich richer" [...] This is a pretty rare case and helps people get into the single digit millions, not billions There are two different categories. Those who have "single digit millions" are "rich" by any reasonable scale. In the us, a net worth of $1 million would put one at around the 89th percentile while a net worth of $10 million would be around the 99th percentile. Those who have "billions" are an entirely different category which presents its own problems -- perhaps we need a different term for it. Maybe "Super-rich"? At any rate, you might want to be careful with the language you use. QSBS does appear to make the rich richer. It probably does not make a big difference in making the super-rich become richer. I would suggest making an effort to use language that makes it clear which you are talking about and one that does not suggest that people with "single digit millions" are not rich. Because we ARE rich, and we need to recognize that fact and behave accordingly as members of society.
- pembrook 5y agoImportant to note that QSBS doesn’t necessarily make sense for some “indiehacker” type businesses. You have to be a C-corp to benefit, which means either double taxation (paying both corporate tax and personal capital gains tax on all distributions) or paying yourself all in salary with payroll/income tax on all of it. If you don’t intended to take on investors (or don’t intend to sell), an LLC or pass through type of arrangement may make more sense in the long run from a tax perspective. Under this arrangement you pay no corporate tax, and can elect to be treated as an S Corp for tax purposes. This way you can receive some of your comp as a dividend which would be at lower capital gains tax rates. Of course, if at any point you plan on chasing investment, Delaware C Corp from the beginning (and QSBS qualification) is generally the best advice. This is complicated stuff, so consult a professional.
- formvoltron 5y agoWhat if you choose to live outside the US (FEIE)? The C corp pays taxes IF there is income. After your salary payment there won't be any income. Important detail is to be sure to claim losses personally if you are investing personally. So if you fail, then at least you've got some capital losses to milk off over the years. Of course with a c-corp you've got a PITA factor... but the PITA factor seems unavoidable when trying to manage IRS complexity.
- pembrook 5y agoVery few desirable countries (other than say Singapore, etc) have lower taxes than the US, so FEIE might be irrelevant if your local country has high income or capital gains taxes. If you’re doing the digital nomad thing to avoid paying taxes anywhere (except to the US, which you can’t avoid) that might make QSBS more desirable, but under the specific scenario that: - you live in a low tax country like singapore (or you intend to stay a traveling digital nomad for years to dodge any non-US taxes) AND - your business doesn’t pay you a salary significantly higher than the FEIE cap of roughly 100k/yr If you make $500k/yr living in Singapore, the FEIE is irrelevant (since as a victim of American global tax you’ll pay US income tax wherever you are) and it’d be better to convert as much of your salary into dividends/distributions as possible to pay lower cap gains rates.