What is a Qualified Small Business Stock?
A summary of potential considerations for potential Qualified Small Business Stock (QSBS) investment eligibility
QSBS is short for Qualified Small Business Stock. The QSBS (Internal Revenue Code Sec. 1202) provides up to 100% exclusion from federal income tax on the greater of 10 times the taxpayer’s basis in the QSBS sold or $10 million of capital gains for qualified investments.1
QSBS was created by Congress to encourage individual taxpayers to make equity investments in startup corporations. There are numerous requirements in order to qualify — for example, there is a required five-year holding period, some service businesses are excluded, only originally issued stock qualifies, and you have to be a member of the Fund at the time of its investment. Certain investments made by AV Funds may qualify, which will vary from fund to fund.
How Does It Work?
- You invest in one of our funds.
- AV seeks to collect necessary information from the company at the time of investment. On your annual Schedule K-1, when one of your fund’s holdings has a liquidity event through an acquisition or IPO, AV will do its best to notify you if the stock qualifies as QSBS. You will need to consult with your tax advisor as to whether you can take advantage in your specific situation.
- AV gives no assurance that any fund will invest in QSBS stock or that any investment will qualify for the exclusion.
- When a Fund’s holding period of a QSBS stock is less than 5 years it is not likely that you will receive information or distributions in order to plan to take advantage of any 60 day rollover provision. Accordingly, the QSBS benefit may be limited to Fund holdings meeting the 5-year requirement.
In sum, while we endeavor to provide information regarding potential QSBS tax benefits on an investment in an AV Fund, the potential benefits may be muted when investing through a fund structure. While AV will seek to track holdings and notify you as to qualification on your annual Schedule K-1, AV does not make investment decisions based on QSBS eligibility and is not responsible for any potential errors or impacts to individual investors
For more on QSBS, click here to read this article.
1 The tax attributes and requirements relating to the QSBS exclusion are complicated, nuanced and specific to a particular investment and investor. AV does not provide tax advice to investors. Please consult your tax advisor before making any investment decisions
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