
Qualified Small-Business Stock rule helps Silicon Valley workers save millions - kbgrant
https://www.nytimes.com/2019/07/12/your-money/small-business-tax-break.html
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tlb
It's not a loophole, it's a specific tax break for people cashing out of
"small" businesses. ("small" means at the time you joined -- it can have grown
huge since.)

QSBS can save you a lot, but it can be a lot of work to file too. I ran up
about $20k in accountant bills doing it on a complex deal.

If you're selling founder or early-employee stock, ask your accountant if QSBS
is right for you.

~~~
Finnucane
Loophole doesn’t have a strict definition. Almost any deduction could be a
loophole. Usually it is referring to anything that helps people with high
incomes avoid paying taxes.

~~~
kaycebasques
The definition is very straightforward. It’s a loophole when others do it,
especially those I don’t like, but it’s a tax break when I do it.

~~~
Finnucane
True, and if poor people could hire lobbyists and tax attorneys, they’d get
more loopholes too.

~~~
zaroth
Progressive tax rates, the doubled standard deduction, child tax credit, EITC,
and Medicaid expansion are all pretty sweet “loopholes” for those on the lower
end of the AGI spectrum.

~~~
thepangolino
For me a loophole is something that requires a certain amount of work to
benefit from. Much more than ticking in a box in a standard form.

~~~
zaroth
For what it’s worth, QSBS is just a matter of filling in the dollar amount and
writing “Section 1202 exclusion”.

To me a loophole is something where you have to perform some sort of otherwise
unnecessary accounting procedure in order to qualify. For example, forming an
S Corp to funnel contracting income through, solely for the purpose of
avoiding the 3.8% payroll surtax.

~~~
betterunix2
A classic example of "we didn't intend for people to do that when we wrote the
law!" One of the costs of living in a rule-of-law society is that sometimes
the law winds up working in unexpected ways.

~~~
zaroth
What do you mean? Section 1202 was very explicitly amended as written to
stimulate investment in small business.

It is a _huge_ incentive for Series AA and A investment, particularly for
smaller early stage investors where it can effectively double the return.

It’s a fantastic policy to help small business raise money and also retain top
talent versus the Goliaths.

There is nothing unintentional about Section 1202. The value of the tax break
was strengthened during the Bush stimulus, and then extended and eventually
made permanent under Obama. It is a nice bit of tax policy with bipartisan
support.

~~~
betterunix2
I was referring to your definition of what a loophole is and the example of
that (forming an S corp to avoid payroll taxes).

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microdrum
Classic New York Times. Explicit tax law = "loophole" if the NYT doesn't like
the people who follow that particular explicit tax law.

~~~
ForHackernews
Special giveaways to _me_ are legitimate tax relief; giveaways to _you_ are
shady loopholes.

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abuehrle
Does anyone have insight into whether QSBS could go away in the foreseeable
future? We're not interested in selling our small SaaS business now, but will
in the next 2-10 years. It would be a shame to miss out on this.

~~~
CalChris
QSBS was created in 1993 but it wasn't useful until 2010. Those changes were
made _permanent_ in 2015. Anything can change but for the near term it
probably won't.

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liminal
With stock options would the 5 year clock start only when the options are
exercised, when they were granted, or when they vested?

~~~
akavi
Both the 50 M$ valuation rule and the 5 year clock start time apply when the
stock is exercised.

Note, however, that the "valuation" from a QSBS perspective is usually
significantly less than the PR valuation you hear when a startup raises a
round (which assumes all shares are valued at the new preferred share price)

~~~
jameslevy
The five year clock starts when you early exercise and file an 83b with a
vesting schedule, or would the clock start only once the stock has vested?

I think it's the former, when you early exercise, but the language seems a bit
confusing.

~~~
techslave
about a year ago i received 2 opinions from 2 very well regarded CPAs that the
5 year clock starts at exercise, including early exercise.

however, as this is an anonymous forum, filled with scoundrels, tax and legal
“advice” should always be ignored with prejudice. you would do well to ask an
accountant or tax advisor on your own.

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toomuchtodo
How early of an employee would you need to be?

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kreetx
When you join the company needs to be valued less than $50 million (by the
article), the price of the actual stock doesn't matter.

~~~
jandrese
So like Eric Schmidt could use this if he cashed out his Google options?

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zaroth
Probably. But it’s limited to the first $10mm of gains.

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CalChris
$10M per year.

(1) In generalIf the taxpayer has eligible gain for the taxable year from 1 or
more dispositions of stock issued by any corporation, the aggregate amount of
such gain from dispositions of stock issued by such corporation which may be
taken into account under subsection (a) for the taxable year shall not exceed
the greater of—

(A) $10,000,000 reduced by the aggregate amount of eligible gain taken into
account by the taxpayer under subsection (a) for prior taxable years and
attributable to dispositions of stock issued by such corporation, or

(B) 10 times the aggregate adjusted bases of qualified small business stock
issued by such corporation and disposed of by the taxpayer during the taxable
year.

[https://www.law.cornell.edu/uscode/text/26/1202](https://www.law.cornell.edu/uscode/text/26/1202)

~~~
zaroth
Not per year! Says so even in the text you quoted, "reduced by the aggregate
amount ... _for prior taxable years_ ..."

It's $10mm per entity, or 10x what you paid for the stock, whichever is
greater.

~~~
CalChris
Yeah, I see your point. But I think the 10X is still yearly. For a founder,
that might not be much. For a funder, that might be a considerable benefit.

    
    
      (B) 10 times the aggregate adjusted bases ... during the taxable year.

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divyahansg
Does QSBS kick in if the company is _valued_ at < $50M or _has raised_ < $50M
at the time of exercise?

~~~
CalChris
Aggregate gross assets.

[https://www.law.cornell.edu/uscode/text/26/1202](https://www.law.cornell.edu/uscode/text/26/1202)

(A) the aggregate gross assets of such corporation (or any predecessor
thereof) at all times on or after the date of the enactment of the Revenue
Reconciliation Act of 1993 and before the issuance did not exceed $50,000,000,

(B) the aggregate gross assets of such corporation immediately after the
issuance (determined by taking into account amounts received in the issuance)
do not exceed $50,000,000, and

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dvduval
Yoda, why is the need for acceptance of self-rationalization so strong in this
the thread?

~~~
ahelwer
Complete absence of humanities education ensures software engineers can
justify damn near anything to themselves as long as they benefit from it.

Very useful trait to have, in a workforce.

~~~
dang
As a former grad student in literature I implore you to avoid a boring two-
cultures spat.

