Couverture de QSBS for FOUNDERS

QSBS for FOUNDERS

QSBS for FOUNDERS

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 This conversation delves into the intricacies of Qualified Small Business Stock (QSBS) and its significant tax benefits for founders. MICHAEL ARLEIN, Partner at Patterson Belknap, explains the eligibility criteria, the importance of strategic planning, and the potential pitfalls that can arise. The discussion also covers the implications of state taxes and the advantages of gifting strategies. We cover innovative approaches like the “GOAT” trust to maximize tax-free gains. Founders are encouraged to engage with legal experts early in their business journey to fully leverage QSBS opportunities. https://youtu.be/lfBt0j7BlW0?si=LufZ8j2YtgdspLMJ Takeaways from “QSBS For Founders” QSBS is a powerful tax benefit for founders.The maximum exclusion amount has increased to $15 million.Careful planning is essential to avoid QSBS pitfalls.Gifting QSBS stock can multiply tax exemptions.State tax implications vary; California does not recognize QSBS.Discounting shares can aid in estate planning.Converting from an S-Corp to a C-Corp can preserve QSBS benefits.Early engagement with legal counsel is crucial for founders.Innovative strategies like the GOAT trust can maximize benefits.Almost all businesses should consider QSBS eligibility. Chapters 00:00 Understanding QSBS: A Founder’s Guide.02:56 Navigating the QSBS Landscape: Common Pitfalls.06:07 Maximizing QSBS Benefits: Stacking Strategies.08:42 The Importance of Timing: Gifting and Valuation.12:03 State Tax Implications: The QSBS Challenge.14:52 Entity Structures and QSBS: What Founders Need to Know.17:37 Transitioning to C-Corp: Strategies for S-Corps and LLCs.20:29 Who Should Pay Attention to QSBS?23:44 Innovative Business Structures: Technology and QSBS-26:36 Early Stage Strategies: Cloning Yourself on the Cap Table- Transcript of “QSBS for Founders” Frazer Rice (00:01.109)Welcome aboard, Michael. Michael Arlein (00:03.096)Thank you. Good to be here. Frazer Rice (00:04.617)So let’s get started here. QSBS, Qualified Small Business Stock, is something that certainly all founders should be aware of. It’s a tax feature. It’s probably one of the nicest goodies that the federal government gives to people who are starting businesses. Take us through a little bit about what happens there. For founders, you’re going to hear the numbers 1202, which is the section that is quoted here. Take us through a little bit about what happens at QSBS and why it’s a powerful feature. Michael Arlein (00:37.496)Sure, that sounds good. To your point, the New York Times called QSBS a lavish tax dodge that is easily multiplied. And I happen to. I’m not aware of any other provision of the tax code that can save anyone as much money as QSBS. It’s really incredible. I think the policy reasons behind the provisions are that they’re designed to encourage entrepreneurship. Everyone on both sides of the political aisle is in favor of. The basic premise of it is that if you create a company.You own the stock for five years. The company’s in the form of a C corporation, It’s not in one of a series of restricted industries. Mainly service industries, that when you sell the stock, you can exclude from paying tax $10 million, the first $10 million of your gain. That’s the old rule, which I’m still dealing with, that that’s for stock that was issued before July 4th, 2025. And now QSBS has gotten even better. So if you get stock after that date. You hold it for actually now three years, you can exclude ultimately up to $15 million from tax. So we’re now dealing with two different regimes. I’m still stuck in the old regime. Most of the people I’m dealing with got their stock before last July. But I’ll try and point out the differences as we go along. Frazer Rice (02:29.066)Sure, as you said, there are a bunch of things you have to jump through. To make sure that you can sort of apply and then to further comply with the rules associated with it. Things like services. Making sure that maybe you don’t have too much cash and that it’s deployed correctly. Making sure that the original stock issuance persists throughout. What are some of the things that you tell your clients? How do you walk them through the process so that they don’t trip on themselves and lose this nice tax advantage? Michael Arlein (03:09.676)Yeah, there are some landmines, things that you can step on and blow it. There’s some weird rules around redemptions. Like if you have redemptions. Let’s say you create a company and then there’s three co-founders. Then very early on, one of the co-founders wants out or you want to kick them out. And then the mechanism for that is the company kind of buys back their stock. You know, there’s complicated rules that can, you know, blow up QSBS for the entire company. I think some people start their businesses as LLCs or S-Corps or things like that, and then later convert them. And that has to be done very, very carefully with good tax ...
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