How to Determine if Your Business Qualifies as a Qualified Small Business Corporation
As a business owner, tax benefits and incentives can be one of the biggest motivators to grow and expand your company. One of these benefits comes in the form of the Qualified Small Business Corporation (QSBC) status. But what exactly is a QSBC and how do you determine if your business qualifies? Let’s dive in.
What is a Qualified Small Business Corporation?
A Qualified Small Business Corporation is a company that meets certain criteria set forth by the IRS. In order to be considered a QSBC, the business must:
– Be a domestic corporation
– Have gross assets of $50 million or less
– Have 80% or more of its assets used in the active conduct of a qualified business
– Be an eligible corporation, meaning it cannot be an S corporation, real estate investment trust (REIT), or regulated investment company (RIC)
Why Should You Care?
The biggest benefit of QSBC status is the potential for a reduced capital gains tax when selling stock. Qualified small business stock (QSBS) acquired after September 27, 2010 and held for more than five years may be eligible for an exclusion of up to 100% of the gain. To put this into perspective, if your business qualifies as a QSBC and you sell your stock for a $1 million profit after holding it for more than five years, you would pay $0 in federal capital gains taxes.
How to Determine if Your Business Qualifies
The first step in determining if your business qualifies as a QSBC is to ensure it meets the necessary criteria. Check to see if your corporation is domestic and eligible as mentioned previously. Next, calculate your gross assets to make sure they do not exceed $50 million. If your assets are close to this number, consult with an accountant to ensure that you remain under the threshold.
After verifying these qualifications, you must also ensure that 80% or more of your company’s assets are used in the active conduct of a qualified business. This means that passive investment income, such as rental income, may not be eligible. Additionally, 10% or less of the value of the company’s assets can be made up of non-qualifying assets.
Lastly, you will need to receive a formal written QSBC certification from the IRS. To apply, you will need to complete and file Form 8949 and include it with your tax return in the year you sell the QSBS.
Conclusion
In today’s economy, every little bit helps when it comes to maximizing profits and tax savings. If you believe your business qualifies as a QSBC, consult with a tax professional to help ensure you meet all the necessary requirements and take advantage of any potential tax incentives. Remember, the process may be time-consuming, but the potential benefits can significantly impact your bottom line.
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