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Qualified Small Business Stock (QSBS) is a powerful tax benefit that allows eligible investors to exclude a portion—or even all—of their capital gains from federal taxes. If you don’t meet the QSBS eligibility requirements for exclusion, a QSBS rollover under Section 1045 of the Internal Revenue Code may be an option. This article breaks down what you need to know about the QSBS rollover and how they can benefit you.
What is a QSBS Rollover?
A QSBS rollover, also known as a Section 1045 rollover, allows investors to defer capital gains taxes when they sell their QSBS and reinvest the proceeds into another qualified small business stock within 60 days. Instead of paying taxes immediately, the gains are deferred until the new stock is sold or disposed of.
Key Requirements for a QSBS Rollover
To qualify for a QSBS rollover, you must meet the following criteria:
Eligible QSBS – The stock you are selling must meet QSBS eligibility requirements, meaning it must have been issued by a C corporation with less than $50 million in assets at the time of issuance and held for at least six months.
60-Day Reinvestment Period – The proceeds from the sale must be reinvested into new QSBS within 60 days.
Qualified Replacement Stock – The new stock must also meet QSBS criteria, meaning it must be issued by a C corporation that qualifies as a small business under IRS guidelines.
Proper Tax Reporting – Investors must properly report the rollover on their tax returns to claim the deferral.
Benefits of a QSBS Rollover
Defers Capital Gains Taxes – Instead of paying taxes immediately upon the sale of QSBS, you can defer taxes by reinvesting in another qualified stock.
Potential Future Exclusion – If the replacement stock is held for at least five years, it may qualify for the QSBS exclusion, allowing you to exclude up to 100% of the gains when sold.
Maintains Investment in High-Growth Startups – The rollover encourages reinvestment in emerging businesses, supporting innovation and economic growth.
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Risks and Considerations
Strict Timing Rules – The 60-day reinvestment window is firm, and missing it will result in an immediate tax liability.
New QSBS Eligibility – If the replacement stock fails to qualify as QSBS, you may lose potential tax benefits.
Tax Law Changes – The IRS may update or modify QSBS and Section 1045 rules, so staying informed is crucial.
How to Execute a QSBS Rollover
Confirm QSBS Status – Ensure that your current stock qualifies as QSBS before selling.
Plan Ahead – Identify potential replacement stocks in advance to meet the 60-day deadline.
Reinvest Quickly – Once the stock is sold, reinvest the proceeds into new QSBS within the required timeframe.
Consult a Tax Professional – Work with an expert to ensure compliance with IRS rules and maximize tax savings.
Conclusion
A QSBS rollover under Section 1045 can be an excellent tax planning strategy for investors looking to defer gains and reinvest in small businesses. However, strict requirements and timing constraints mean careful planning is essential. If you’re considering a QSBS rollover, consult a tax advisor to ensure you take full advantage of this valuable tax deferral opportunity.
About the Author
Brett Rosenstein
Founder of Build Accounting
Certified Public Accountant
Brett is the founder and president of Build Accounting where he provides accounting, tax filing, and CFO services for startups and small businesses. His goal is to make the accounting and tax process as simple, streamlined, and headache-free for business founders as possible.
Brett received a Bachelor of Science in Business Administration from The Ohio State University. He is also a Certified Public Accountant.
When Brett is not working, he is running, biking, spending time with his wife and daughter, or trying new pizza places.
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