Qualified Small Business Corporations (QSBCs) after the TCJA QSBCs are a special breed of the C corporation species. The difference between QSBCs and garden-variety C corporations is that QSBC stock is potentially eligible for:
(1) several gain exclusion breaks (within limits explained later), and
(2) a taxfree gain rollover break. Most importantly, QSBC shares acquired on or after September 28, 2010 are potentially eligible for a 100% gain exclusion break. Even better, the Tax Cuts and Jobs Act (TCJA) makes QSBCs more attractive than ever.
Key Point: The gain exclusion and gain rollover breaks for QSBC stock sale gains are not available to QSBC shareholders that are themselves C corporations [IRC Sec. 1202(a)(1)]. However, gains from selling QSBC stock held by pass-through business entities (LLCs, partnerships, and S corporations) can be passed through to the individual pass-through entity owners and potentially qualify for the gain exclusion and gain rollover breaks at the owner level [IRC Sec. 1202(g)].
When QSBC status is available for a start-up business, it can be a tax-smart alternative to the conventional wisdom that operating as a pass-through entity is almost always the right way to go.
We will begin our analysis of QSBCs by covering the gain exclusion breaks and the related AMT preferences, which have both been moving targets in recent years. We will conclude by covering the tax-free gain rollover privilege and specifics about what it takes to be a QSBC.
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