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QSBS, qualified small business stock, can let a founder sell shares and pay zero federal tax on the gain, up to a limit.
Transcript
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So, here's a tax break that can save a founder millions of dollars. Most people have probably never heard of it. It's called QSBS, qualified small business stock. So, let me explain to you what it means in plain English. Say if you own a stock in the right kind of company, and you hold on to it for a very long time, when you go sell it, you might pay zero in federal taxes on that gain.
Not lower, zero. And of course, there's up to a limit, and for most people, this limit could be in the millions of dollars. So, let's do some simple math so I can explain this to you. Say you sell your shares for $5 million of gain. Normally, that's federal taxes could be close to up to 1.2 million.
With a QSBS, that could be zero. So, let me explain what a stock qualify, what does that mean? Three things. First thing, the company has to be incorporated as a C-corp, not a LLC, not a S-corp, a C-corp. The second thing, the company has to be small whenever you first get the shares.
What that means that under $50 million in assets. And that's what the company owns on its book, not what it's worth. And that number went up and with the new tax law, and I'mma cover that in part two of this video. And then, the third one is that you have to get that stock straight from the company.
So, that could be founder shares, exercising your options, or stock that you earn from working there. If you buy the shares from another investor, that usually doesn't count. Then, then you hold on to it. The classic rule is five years. Now, it's not for every business. There's business that There's excluded from this.
They're like banks, restaurants, hotel, consultant, and a few others that are left out. And it's only on the federal level. So, some states like California, they don't follow this. So, what does this mean or matter for you? Because the move to make the QSBS work happens years before you sell. How you set up the company, when you exercise, when the clock starts, all that matters.
And by the time most people hear about this, it's too late to fix it. All that to say, if you're a founder or if you're holding startup equity, this is a conversation to have early, very early on with your CPA or planner to make sure that you have all the steps in place to make sure that you're qualified for this.
In part two, I want to walk you through what changed with the 2025 tax law. So, follow along for more. Thank you, and I pray you have a wonderful day.
This video is for general educational purposes only and is not personalized investment, tax, or legal advice. Every situation is different. Talk with a qualified professional about your circumstances before acting. PLC Wealth Partners is a registered investment adviser. See our disclosures.
