Qualified small business stock

For some business owners, federal tax laws offer sizable tax benefits. Notably, an individual, trust, or other noncorporate person who owns qualified small business (QSB) stock can potentially defer or exclude gain on the sale or disposition of the stock. They can generally defer gain by reinvesting it in other QSB stock, and they can generally avoid any income tax on any excludible gain. For many shareholders, the excludible gain is $10 million per company. For others, it’s more. Moreover, with proper planning (often involving trusts), a shareholder can stack (multiply) the exclusion, further enhancing the benefits of owning QSB stock.

Qualifications
For shares to qualify as QSB stock, they must satisfy an intricate array of company-level requirements and shareholder-level requirements.

Company-level requirements
For its shares to qualify as QSB stock, a company must be organized in the United States, and it must be classified as a C corporation.¹ The shares of a company organized outside of the United States, thus, won’t qualify as QSB stock. Likewise, the shares of a company that’s classified as a partnership for federal income tax purposes also won’t qualify as QSB stock. For example, membership interests in a multi-member limited liability company won’t qualify as QSB stock if it’s classified as a partnership for tax purposes.²

¹ IRC § 1202(c)(1).
² In some cases, a company that’s classified as a partnership can convert into a company that’s classified as a C corporation, so that its shares potentially could qualify as QSB stock. This sometimes is advantageous, but it raises a host of tax, legal, and practical issues. See, e.g., PLR 201636003 (September 2, 2016).