Okay, if you are starting a business,
I've got some great news for you. You can potentially start a business,
grow it, and then sell it years later completely tax-free.
So this is called the QSBS.com.
It's the the It's the section 1202 in the IRS
tax code that allows you to sell now under the newest tax law
with the big beautiful bill that passed last month,
or I guess earlier this month. up to $15 million of tax free.
So in this episode, I'm going to go over how you can make sure
you're structured correctly, that you've got the right type of business that would qualify
as a qualified small business stock, because there are some certain types of,
even if you're offering certain types of services,
if you're a certain type of business where you just wouldn't qualify at all
for it. So there's some specific steps to follow to make sure you qualify
to get up to the $15 million.
tax free, completely tax free capital gain by selling your business.
Um,
well, first off, I'm going to tell you that this has been around for
quite a few years. There has been a qualified small business stock exclusion,
but it kind of just got thrown back into the spotlight because of the
changes earlier this month before.
And actually, I'll give you like a brief high level summary of some of
the changes. So before it was a $10 million capital gain.
Exclusion, you could sell up to $10 million and you had to have the
business, uh, at least five years.
There was no tiered approach. It was either all or nothing.
You had to get past that five year,
like be operating the business for five years.
Then sell it to get the $10 million tax free exclusion.
Now there's some tears that I'll go over with the,
uh, with this new, the big, beautiful bill changes.
And of course it went up to the 15 million.
And then one of the biggest things and it changed a little
for the type of business you need to,
you need to have and operate. But there's a very specific structure and
that is, that's why I'm saying this is one of the biggest things you
need to watch out for because when you form the business initially and
when you're creating the business, when you're putting assets into it,
if you're raising money or whatnot, it needs to be formed in a specific
way. So it needs to be a C corporation.
I know we've talked a lot about partnerships and S corporations and different types
of holding companies, operating companies, but it needs to be a corporation that
files a C corporation tax return.
And under this new threshold, it needs to have,
which is actually pretty high,
but it needs to have less than $75 million of assets to
be counted as a small business because it's a qualified,
in the, in the actual name, it's a Qualified Small Business Stock.
It's a B, Qualified Small Business Stock.
It's a B.C. corporation.
You need to have less than $75 million of assets as you begin. Uhm.
Or as you're, you know, launching the business.
So you can't just spin off a business with hundreds of million dollars of
assets and try to grow a business and sell that tax-free.
There's gonna, there's a lot of, like, planning techniques you can get into.
But it's gotta be a legitimate new business and a small business.
So new, new C corporation in less than $75 million.
But if you really think of like, like why,
why is the government doing this? That's a government is promoting.
The government wants new businesses.
It wants founders. It wants you to create a new business and create new
products and do new things and innovate.
Of course, we know under the Donald Trump.
Trump presidency, they want to bring back a lot of things into America.
So they want you to grow and start and found businesses in America,
which I love that as well. And as a CPA,
that's, those are the type of people we work with business owners.
Investors, people that are making new products and doing things,
providing services. So another thing to watch out for is,
so I've said it's got to be C corporation,
right? Less than $75 million of assets to begin.
Then you've got to have,
and actually I need to pull up this list. Um,
so I'm actually going, I'm going to read off some of these specific things
that do not qualify or specific businesses that do not qualify under
the qualified small business stock, like the sale,
the gain exclusion that we're talking about. And then I'll talk about some businesses
that do typically that would qualify.
So the things that don't qualify right at the top are accounting firms.
CPA firms, accounting firms wouldn't qualify.
There's a whole section of professional services.
Like if you're a professional service firm,
you're not going to qualify. So that is like law firms,
accounting firms. I'll go through the list.
Actuarial science, consulting firms,
financial services like financial advisory,
brokerages, uh, health services,
doctors, dentists, sorry,
chiropractors, sorry.
Physical therapists, like those types of things,
if you're providing those services, it wouldn't count.
Performing arts would not count.
Hospitality, like hotels, motels,
restaurants, don't count.
So you're starting to think, like, well, then what counts?
And I'm going to keep going, actually, on what does not count.
So these continue that list of financial businesses,
like banking, insurance, leasing, farming does not count.
Real estate, unfortunately, investing,
development, brokerage does not count.
Oil and gas does extraction and mining,
like natural resource types of things do not count.
So all of those don't count. The main categories,
professional services don't count. Hospitality doesn't count.
Farming, financial businesses, real estate,
mining, and natural resources. Resources do not count,
which I wish they did, because everything I do is in that
category. And I know a lot of, it's pretty encompassing of what
does not count. But here's what does count.
So if you think about of, like, tech companies,
software companies, hardware, software as a service companies,
like, products, you're selling products,
like, startups for that do count.
E-commerce, manufacturing, logistics.
Consumer products, green energy companies,
like, solar, we got some solar clients,
those would count. Biotech would count. You just can't offer services,
so it's mostly services, but software,
and software as a service counts.
So, if you have,
here's a recommendation I have. If you have a business,
and I'm thinking of some very specific clients here,
where if you have a business and you're offering services in
a business, and say you've got one entity,
business entity right now, and you're offering services under that business entity,
and you're starting to maybe launch some products,
and you're starting to maybe, you're setting up a software,
or you're creating an app, and you're starting to sell things to other clients.
Businesses, if you still have it under that same umbrella,
I would change that. I would, I would not hold everything under that same
umbrella. And if, if we've done a one-on-one consulting,
I've probably already recommended that, but don't hold it all under the same umbrella,
because you need to actually carve out that new service or that,
that product, like the product or the software or the hardware,
the thing that qualifies, put them in different entities,
put the thing that qualifies for the course, the qualified small business doc,
put that in a C corporation, grow that for five years and sell it
and sell that portion tax free. So think of that as part of like
the entity structure that I want you to think of.
So we covered things that don't qualify, things that do qualify,
uhm, you can of course sell it to folks.
15 million dollars tax free and that's per partner.
That's for each, each of the owners can be up to $15 million.
Then the last thing I'm going to cover is that there is,
there's a change, there's a tiered approach to how much,
uh, how much can be sold tax-free because before it was
all or nothing. You had to meet the five-year threshold from when you launched.
You had to just hold out that five years to qualify for tax free
gain. But now under this new big,
beautiful bill change, you will hit a $15 50% threshold or
you can exclude up to 50% if you get past a three-year timeline.
If you get to four years, you can include up to 75% of the
gain up to that amount. And once you hit the five-year mark,
you can include up to a hundred percent of the gain up to the
three to 15 million mark. Um,
so we talked about, so these are kind of the key changes I wanted
to make sure to cover. So there's the tiered approach going from 10 to
$15 million.
the assets it's 50 million up to $75 million to start
Um, there's an AMT change,
but we won't even get into the alternative minimum tax changes.
But it makes it a little easier to qualify.
Um,
and then it does,
it counts to well, it still counts to new stock.
Remember, it needs to, with these changes,
it needs to be a new company. You can't have an old C corporation.
You say, Oh, great. These are the new rules. It has to be starting
after July 4th. These are businesses you've started now after July 4th,
or you will start those new C corporations will qualify under these new
rules. If it's an old C corporation,
it'll still qualify under those old rules, but that's it.
That, so that is the qualified small business stock.
I want you to think of how,
just think through how you can receive tax-free income down the line.
And you can see, you can probably start to see that a few of
these changes in the beginning, like five years in advance.
Thinking about it now, instead of when you're about to sell something,
can save you, in this example, could save you three or four million dollars
in taxes, which is just absolutely crazy by just making a few smi,
my. Minor changes, honestly,
just minor changes in how you report could save you three or four million
dollars per owner. So it's, it's pretty amazing.
So if you're a founder, you're starting a business, make sure you're thinking of
this. And that is it. That that's all for today on the 1202 stock
in that qualified small business document.
Exclusion. Talk to you later.
