QSBS Questions. A lot of them.

June 18, 2025

by a searcher from Northwestern University - Kellogg School of Management in Miami, FL, USA

I tried searching for similar posts but couldn't find any answers. 1. Is it possible to structure any deal to comply with the requisites of QSBS, i.e., the prerequisites are that of the acquiring Co, or, QSBS compliance depends on characteristics of the acquired Co? 2. If the first, can you structure the deal as an asset sale where the acquiring Co is a C-corp, who then issues shares to the pass-through entity or individual? 3. If so, what are the pros/cons of doing that, as opposed to an asset sale directly into an LLC? 4. Do we have visibility around QSBS in the current tax policy discussions? Sorry if the questions don't make much sense. I'm trying to wrap my head around how does this whole thing work. Cheers!

0 Likes

10 Replies

170 Views

Replies

Reply by a searcher
from Princeton University in Annandale, Clinton Township, NJ, USA

NOT LEGAL OR FINANCIAL ADVICE, but I'll take a crack at these. 1. The answer here is both. The "acquiring corporation" has to meet certain criteria. For example, for shares to qualify for QSBS status, they must be purchased directly from a C-corp. Basically, when you form your C-Corp, your investors can only qualify for QSBS tax treatment on newly issued shares purchased directly from the company. There are other criteria that must be met by your "acquiring" C-corp as well like: a) shareholders cannot be C-corps (individuals or pass through entities ok), shares must be held for more than five years, shares must be sold (i.e. if your selling the company down the road, must be a stock sale not asset sale), etc. Check out this link for more: https://frostbrowntodd.com/a-section-1202-walkthrough-the-qualified-small-business-stock-gain-exclusion/. The target company also has to meet certain criteria. These mainly pertain to the industry/type of business ("qualified trade or business"--reference the exclusions in the link above) and business size (>$50mm gross assets). There are also some ongoing reporting requirements that need to be maintained post acquisition so you have a paper-trail proving that the company remained compliant with QSBS regulations the entire time the stock is outstanding. 2. Yes. You form a C-corp, sell shares to investors, then buy a business through an asset sale. As long as the target company assets comply with the "qualified trade or business" criteria, I think you should be ok. Alternatively, if you are buying an S-Corp or LLC, you can do an equity purchase and use a 338(h)10 election to have your equity purchase treated like an asset deal for tax purposes (aka you get to depreciate goodwill for tax purposes). 3. The primary PRO of doing this is that if you plan to hold the shares for more than five years, when you ultimately sell you don't have to pay capital gains taxes on your gains up to 10x your principal investment OR $10mm, whichever is greater. The primary CON is the main issue with C-corp's in general--they are subject to "double taxation". The corporation pays taxes on its profits along the way, and investors pay tax on any distributions/capital gains. As a result, the best scenarios (in my opinion) for QSBS are startups, high-growth, or highly-levered small business acquisitions, where you don't expect the Company to have significant profits from a taxable income perspective. 4. Don't know. I worked with Frost Brown and Todd (legal) on my small business acquisition, and structured my transaction with QSBS shares. They were very helpful and they have a lot of content on this structure. Hope this helps!

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

Non-legal, non-tax advice. 1) Buyer entity should be a C Corp(X). All shareholders who got original issues of X are eligible if X is sold in a stock sale after 5 years hold. Selling entity is irrelevant (assuming <$50 M in assets) 2) X can acquire existing business in an Asset or Stock purchase, or X can be a start-up. 3) Benefit is no tax when X is sold. For each shareholder, capital gain tax free up to max of $10 M or 10x the investment. 4) Senate proposal makes QSBS more attractive. $10 M to $15 M. $50 M to $75 M. Also, lower hold periods benefit at reduced rates###-###-#### yrs (50%), 4 yrs (75%) and 5 yrs (100%)

+8 more replies.

Join the discussion