Rained hard last night. We like a good rain in Texas. Keep the temperature down, but I always fear the mosquitoes.
So, speaking of mosquitoes, let’s discuss the QSBS — Qualified Small Business Stock. [Nice segway, eh?]
Stop — DO NOT TAX ADVICE FROM AN EIGHT CYLINDER V8 MUSCLE CAR UNDER ANY CIRCUMSTANCES. Think of this like sitting next to a drunk at a bar who is slurring his words and falls off the stool twice. That good. No more.
Oh, one more thing — if you are an entrepreneur, founder, ground floor stock owner — listen the Hell up. Trust me.
OK, so the QSBS is a great deal if you qualify. It will allow you to exclude up to 100% of your profits in a qualified small business up to $10,000,000 under certain conditions. This is the kind of money we are talking about here.
OK, what exactly is the deal, Big Red Car?
Here it is.
1. The investment has to be in a “qualified” small business — domestic C Corporation, not a flow through legal entity — with gross assets (valued at original cost) less than $50,000,000.
This could have been Uber up until about 2013. Gross assets is not “value.” This is why you need to talk to an accountant, a real one, not a Big Red Car.
2. The investor — meaning you — cannot be a corporation.
3. The investor must have purchased the stock for cash (or property, or payment for a service).
4. The investor has to hold the stock for five years.
5. The issuer of the stock — the domestic C Corporation — must have at least 80% of the corporation’s assets deployed in operations in its core qualified trade or business.
6. The C Corp cannot be in finance, farming, or mining. [Which means it can be technology, eCommerce, retail, wholesale, manufacturing.]
The Internal Revenue Code addresses all of this in Section 1202 — wonderful read for a sleepless night. Your accountant should know all of this — if not, get a new accountant.
Tell me the payoff again, Big Red Car
OK, the payoff is this:
1. You can forego paying capital gains taxes on up to a maximum of $10,000,000 or 10X of your adjusted basis (this is when you go see a real accountant), whichever is greater. Hello, America!
“Ma’am, founder person, a caller identifying themselves as the American Dream is on the phone for you?”
“The American Dream, ma’am. Yes, I know, sounds crazy. I thought he was dead also.”
“Put him through, please.”
2. You make more than $10,000,000 in capital gains or 10X your adjusted basis — your Big Red Car hopes you do, dear reader — you pay long term capital gains taxes at 28% on the balance.
3. To get into the weeds — the gains are also excluded from Alternative Minimum Tax (AMT) and Net Investment Income Tax (NII).
4. If you don’t hold for five years as required and sell short of the finish line, you have 60 days to invest the proceeds in another QSBS vehicle. Wow! Must have had some damn good lobbyists.
5. You can do some fancy footwork by creating trusts whereby others — typically family members — also invest under the same conditions.
Yep, $10,000,000/10X exclusion EACH. <<< This is how the rich get richer, but you knew that.
Who says that the government doesn’t love venture capitalists? But, wait, you know who can really benefit from this? Entrepreneurs and founders.
Can we work a problem, Big Red Car?
You love to work the problems, don’t you? OK, here it is:
1. You invest $2,000,000 in a QSBS entity.
2. Five years plus one day (a very good day), you sell the investment for $22,000,000. Hello, America!
3. Of that $22,000,000, $2,000,000 is your adjusted tax basis, so your long term capital gain is $20,000,000 [$22,000,000 minus $2,000,000 equals $20,000,000]
4. 10X your initial $2,000,000 investment is $20,000,000, so you, founder or investor, pay NOTHING IN LONG TERM CAPITAL GAIN TAXES.
“Ma’am, that same caller is on the line again, the American Dream. What should I tell him?”
“See if he’s free for dinner. My treat. Tell him to wear something sexy.”
So, there you have it, dear reader. Go make an investment in a QSBS qualifying small business, hold it for five years, reap a $10,000,000 exclusion from capital gains (put your four kids in it with their own trusts), and Bob is your uncle.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. Be well and prosper.