Are you looking to inject cash into your small corporation? Or do you have your eyes on another promising venture? If you acquire qualified small business stock (QSBS), you can enjoy a tax exclusion on 100% of your capital gain when you sell the stock down the road.

To qualify for the QSBS tax break, the following requirements must be met: 

• The issuing corporation must be a C corporation,
• The stock must have been issued after August 10, 1993,
• The stock can’t be acquired in exchange for other stock,
• At least 80% of the corporation’s assets must be used in the active conduct of a qualified trade or business, and
• The corporation can’t have more than $50 million in assets when the stock is issued.

Also be aware that some businesses are ineligible, such as those involving real estate or personal services (for example, law, health and financial services).

If you sell QSBS after a holding period of five years, you may exclude from tax 100% of the realized gain, within certain limits. But the amount of gain taken into account for a QSBS sale in a particular year is limited to $10 million and can’t exceed 10 times the basis of QSBS stock sold during the year. 

Assume you invest $1 million in QSBS issued by your small corporation on June 1, 2022. If you hold the stock until at least June 2, 2027, you can sell your QSBS for up to $10 million without owing any capital gains tax. 

Let’s say that you sell the QSBS after five years for $5 million. When you subtract your initial $1 million investment, you’ll pocket a $4 million capital gain, completely exempt from tax.

If you wish to sell QSBS before five years are up, you can defer any tax by rolling over the proceeds into new QSBS within 60 days. 

Finally, be aware that the QSBS gain exclusion was previously limited to 75%, and, before that, 50%. A return to 50% has been proposed — under specific circumstances relating to a taxpayer’s adjusted gross income. So, you may want to move quickly if this tax-saving strategy might make sense for you.