Business Ownership 5+ Years: QSBS Exclusion and Advanced Planning

With more than five years of ownership, you may qualify for the QSBS exclusion to eliminate federal tax on up to $10 million in gains. Verify your eligibility.

QSBS exclusion may apply. Under Section 1202, if you held qualified small business stock in a C corporation for at least five years, you can exclude up to $10 million in gain (or 10x your adjusted basis, whichever is greater). For stock acquired after September 27, 2010, the exclusion is 100% -- meaning zero federal tax on the excluded portion.

Long-term capital gains rates are locked in. Any gain not covered by the QSBS exclusion is taxed at the favorable 0/15/20% rates under Section 1(h), plus the 3.8% NIIT where applicable. No risk of short-term treatment.

Advanced planning opens up. With a long holding period, strategies like charitable remainder trusts, donor-advised fund contributions of appreciated stock, and grantor trust sales become practical tools for reducing the effective tax rate further. Estate and gift planning with business interests is also more straightforward when the holding period is established.

The tradeoff: Maximum flexibility does not mean automatic savings. The QSBS exclusion has strict qualification rules -- entity type, active business requirement, aggregate gross assets under $50 million at issuance. A CPA needs to verify eligibility before you count on it.