Qualified Small Business Stock – Planning to Avoid the Capital Gains Tax Increase

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Qualified small business stock is popular with Silicon Valley founders and employees, but others can potentially obtain it as well. - Bloomberg News
What Happened

President Biden has proposed to increase long-term capital gains tax rates to ordinary income rates for taxpayers earning more than $1 million per year. Thus, under the Biden tax proposal a shareholder selling their business stock for more than $1 million would pay a maximum combined federal and California capital gains tax rate of 56.7%.

Qualified Small Business Stock – A Lucrative Tax

One tax provision that neither the Biden administration nor Congress has yet proposed to repeal is the Qualified Small Business Stock (“QSBS”) provisions under Section 1202 of the Internal Revenue Code. Stock qualifying for QSBS treatment can qualify for excluding gain from federal income taxes (Please see below for details).

This is something newly formed businesses should consider for choice of entity. Existing partnerships may also consider conversion to C Corp to avail themselves of QSBS favorable treatment on post conversion gain.

We’re Here to Help

California does not have a similar QSBS tax exclusion. There may be tax planning ideas to permanently move out of California or establish out of state trusts to own the business stock.
Should you have questions on the above, please give us a call or send an email. We will continue to deliver updates on Tax Alerts and other developments.

Additional details

1. Federal Income Tax Benefits of Qualified Small Business Stock

For domestic C corporation shares that were acquired by the taxpayer on or after September 27, 2010, the taxpayer could exclude up to 100% of the gain from the stock sale (including the 3.8% net investment income tax), but subject to the limits discussed in paragraph 4, below. This exclusion from gain recognition percentage falls to between 50% to 75% for stock issued on or before September 27, 2010.

2. Qualified Small Business

Qualified Small Business specifically excludes businesses such as financial companies, performing arts, athletics, energy production, hospitality, hotels and farming. Service industries such as accounting, engineering, brokerage services, healthcare, banking and insurance are also specifically excluded.

3. The Following Requirements Must Also be Satisfied:

  • The stock must be acquired at the stock’s original issuance after August 9, 1993, in exchange for money or other property (not including stock) or as compensation for services provided to the issuing corporation;
  • The corporation must conduct an “active business” for substantially all of the shareholder’s holding period;
  • The corporation must be a C corporation;
  • The shares must have been held by that shareholder for at least five (5) years;
  • The shares must be issued to a noncorporate shareholder;
  • The tax basis of the gross assets of the corporation at all times from August 10, 1993 until immediately after the issuance of the taxpayer’s stock must be less than $50 million;
  • Certain redemptions can retroactively eliminate QSBS treatment

4. Gain Exclusion Limitations

A significant benefit of QSBS held more than five (5) years is to exclude the greater of:

  1. $10 million of capital gains reduced by the gain excluded by the taxpayer under §1202 for prior tax years of that same issuer; or
  2. Ten (10) times the adjusted basis of the QSBS of that issuer that is disposed of by the taxpayer during the tax year.

This limitation is per each shareholder and is $10 million for two spouses filing a joint return.

5. Ability to Rollover the Gain on the Sale of Qualified Small Business Stock

Electing shareholders can sell their QSBS in a taxable transaction and purchase new QSBS within sixty (60) days to avoid recognizing gain as long as the QSBS is held for at least six (6) months and that the sales proceeds do not exceed the amount invested in the new QSBS shares.

Angela Zheng | Tax Engagement Partner


Angela has over 15 years of experience in public accounting. Angela specializes in providing tax consulting, planning and compliance services primarily to middle-market and closely held family businesses in a variety of industries.  She serves clients in all phases of the business cycle ranging from start-ups to mature companies and business owners seeking exit strategies and other liquidity events. Angela helps her clients achieve their business goals. She works with the business owners to ensure that tax planning is done in an integrated manner, addressing the needs of both the business and the owners so that planning opportunities are fully optimized for all stakeholders.


Angela’s experience also includes addressing the complex tax requirements of multi-state entities, as well as companies with international operations. Angela has significant experience serving real estate clients, including real estate investors, operators and real estate funds. Angela also provides tax services to a wide range of professional services firms including law firms in Southern California.


Angela taught taxation training classes within the firm and speaks at other financial institutions as well.

Professional Qualifications and Education
  • Certified Public Accountant, State of California
  • Master of Accountancy (Tax concentration), University of Iowa | Iowa City, Iowa
Professional companies and Activities
  • American Institute of Certified Public Accountants (AICPA)
  • California Society of Certified Public Accountants (CALCPA)
Industries Served
  • Real Estate
  • Technology/Start-up
  • Manufacturing & Distribution
  • Retail
  • Professional Services
  • Healthcare

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