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Home / SmartTech / How to build a startup or invest in it without paying capital gains tax – TechCrunch

How to build a startup or invest in it without paying capital gains tax – TechCrunch



Founders, Entrepreneurs and technical executives know that they may be able to avoid the tax payment in whole or in part of the profit from selling shares in their companies ̵

1; provided they qualify.

If you are a founder who wants to take this opportunity, you should carefully consider starting, operating, and selling your business.

Qualified Small Business Shares (QSBS) provide significant tax savings for people who start and invest in small businesses. It can potentially exclude you from taxation up to $ 10 million or ten times your tax base, whichever is higher. For example, if you invested $ 2 million in QSBS in 2012 and sold that stock for $ 20 million (10 times the base) after five years, you could not pay federal capital gains tax on that profit.

What is QSBS and why is it important?

These tax savings can be so significant that they are one of the few high priority items that we will discuss first when working with a Founder or a Technical Director. Surprisingly, most people generally also know:

  1. some basics about QSBS;
  2. know that they have it, but do not look for ways to leverage or protect it;
  3. You do not know anything about it.

Business start-ups usually have a lot in mind, and tax savings and personal finance are usually at the bottom of the list. For example, I recently met someone who says goodbye to his upcoming $ 30-40 million liquidity event. He is qualified for QSBS, but until our interview he did not even think about using it.

What does 0% sound like instead of paying long-term capital gains taxes? That's right – you may be able to exclude up to 100% of your federal capital gains taxes from selling the investment in your business. If your company is (or has been) a venture-backed technology startup, chances are you'll qualify.

In this guide, I specifically speak at federal tax level with QSBS Note that many states such as New York are following federal treat- ment of QSBS, while states such as California and Pennsylvania are completely banning exclusion. There is a third group of states, including Massachusetts and New Jersey, which have their own amendments to the exclusion. Like everything else I'm talking about here, this should be discussed with your legal and tax adviser.

My team and I recently talked to a founder whose company was acquired. She wanted to do some financial planning to understand what her personal record after the acquisition would look like, which is a smart move.

We have worked with their business consultant and accountant to obtain a QSBS representation of the company, and modeled the founder's effective tax rate. It owned equity in the form of equity interests that met the criteria for classification as Section 1202 Stock (QSBS) . When she acquired the shares in 2012, her cost base was virtually zero.

A few months after the expiration of the five-year holding period, a stock corporation acquired its business. Her shares, which she first bought for zero, now totaled $ 15 million. When she was able to sell her shares, the first $ 10 million of her capital gains were completely excluded from federal taxation – the remainder of her profits being taxed on long-term capital gains.

This founder saved millions of dollars in capital gains taxes on their liquidity event, and it's not the exception! Most founders who run a venture-backed C Corporation technology company can qualify for QSBS if they buy their shares early. There are a few exceptions.

  Example of qsbs tax savings

Do I have QSBS?

A frequently asked question while discussing QSBS with our clients is: h How do I know if I qualify? In general, you must meet the following requirements:

  1. Your company is a domestic C Corporation.
  2. The shares are purchased directly from the company.
  3. The shares have been held for over 5 years. [19659010] Shares were issued after August 10 in 1993 and ideally after September 27 for a full exclusion of 100%.   qsbs shares were acquired
  4. The company's assets may not have been more than $ 50 million at the time of acquisition.
  5. The company must be active, with 80% of the assets used to run the business. It can not be an investment company.
  6. The business can not be an excluded business type, e.g. B .: finance, professional services, mining / natural resources, hotel / restaurants, agriculture or any other business where the reputation of the business is the ability of one or more of them is the staff.

If in doubt, follow this flowchart to determine if you qualify:


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