Maximizing QSBS Tax Savings with Trusts

Section 1202 of the Internal Revenue Code (unless otherwise stated, all references to the “section” are to the Internal Revenue Code) provides that a taxpayer who has acquired shares of a corporation that qualify as Qualified Small Business Shares (QSBS Shares) after September 1. 27, 2010, may exclude the greater of $10 million and 10 times its basis in its QSBS shares from income (QSBS Exclusion). Section 1202(h) provides that if a taxpayer gives QSBS shares to another taxpayer, the recipient should also be entitled to an additional QSBS exclusion. A taxpayer who owns QSBS shares can donate these shares to different types of trusts to significantly reduce the income tax payable on the sale of these shares.

In general, for shares to qualify as QSBS shares:

• The shares must be shares of a National C Corporation, whose total gross assets did not exceed $50 million before and immediately after the issuance of the shares;

• the shares must have been originally issued by the company in exchange for money, goods or services;

• the taxpayer must have held the shares for at least five years before the sale or exchange;

• at any time during the taxpayer’s holding of the shares, the corporation must have been engaged in a qualified trade or business described in §1202(e)(3); and

• the shares must not have been disqualified as QSBS shares under various provisions of §1202.