Qualified Small-Business Stock rule helps Silicon Valley workers save millions

https://www.nytimes.com/2019/07/12/your-money/small-business-tax-break.html

by kbgrant • 7 years ago

106 64 7 years ago

tlb• 7 years ago

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.

outericky• 7 years ago

Seriously... not a loophole. Explicit tax rule. Just making it look like people are somehow taking advantage of the system. FUD.

walshemj5• 7 years ago

To modify an older UK saying "nothing so sanctimonious as a newspaper journalist"

The original is about a certain police force and was by Winston Churchill

dang5• 7 years ago

Ok, we've replaced 'loophole' with the name of the thing above.

asr2• 7 years ago

The New York Times headline uses the word “loophole.” It’s not appropriate to rewrite that headline simply because you don’t like it. If “loophole” were an incorrect choice of words it would not be in the headline.

EDIT to add I understand moderation is a thankless job and thank you for doing it. But I disagree with this particular call.

Finnucane4• 7 years ago

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• 7 years ago

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.

clamprecht• 7 years ago

The 5th Amendment is a loophole that gives defendants due process.

SilasX• 7 years ago

It only feels right to call something a loophole, IMHO, if it's clearly out of the scope of the intent of the law.

Not a loophole:

Government passes electric car tax credit to promote electric vehicles -> Entrepreneur starts a successful business selling them due to a relative advantage over conventional vehicles.

Government taxes businesses based on how profitable they are -> Business pays none of the tax because it hasn't made back its initial expenses.

Loophole:

IRS doesn't consider it a kind of compensation when employers provide meals to coal miners, since it's really not feasible to eat at a coal mine any other way, and so exempts employer-provided onsite meals. -> Tech companies in urban areas provide all meals, and employees get all of a day's food, through untaxed onsite meals.

Government allows deduction of business expenses from taxable income. -> Business mysteriously never has taxable income because it blows all profits on "consulting services" from an untaxed non-profit that the owner runs.

ForHackernews2• 7 years ago

It does seem like taking the piss for a multimillion dollar startup to qualify as a "small business". Just because you're staying within the letter of the law doesn't mean it's not a loophole -- arguably that's exactly what a loophole is.

According to the article, professional accountants consider this scheme dubious.

walshemj5• 7 years ago

You know startups start you know start small Apples initial seed capital was a few thousands I believe.

The UK has something similar for small companies the EMI share schemes - all of the employees where I work have these options.

zaroth7• 7 years ago

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.

I don’t understand this. You just claim it on the Schedule D. As far as I know, you don’t file any documentation at the time of the tax return, you simply attest that it qualifies.

bradleyjg• 7 years ago

Okay, let's call it a tax expenditure instead. What public interest is this expenditure advancing and how efficiently is it advancing that interest as compared to alternative expenditures?

betterunix23• 7 years ago

It incentivizes investments in small businesses, which generally have trouble attracting investors because of the high risk of failure. In general we want people to take risks and start new businesses to maintain a healthy and competitive market. That employees who are paid in stock also benefit is a good thing, because in addition to capital investments a startup also requires talented workers to help get off the ground.

toomuchtodo2• 7 years ago

How early of an employee would you need to be?

kreetx• 7 years ago

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.

toomuchtodo2• 7 years ago

Thank you, this is very helpful for me.

jandrese• 7 years ago

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

supernova87a• 7 years ago

That is not correct. The rule applies if the value of the company __at the time of issuance (stock issuance)__ was less than $50m.

For most people at major companies that are going to go public, and got ISOs, this rule wouldn't help you. By the time a company goes public and stock is issued (not talking options here), everyone is hoping to be worth billions.

microdrum• 7 years ago

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

ForHackernews2• 7 years ago

Special giveaways to me are legitimate tax relief; giveaways to you are shady loopholes.

umeshunni• 7 years ago

Yup. This is some serious clickbait. Flagging.

liminal• 7 years ago

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

akavi2• 7 years ago

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• 7 years ago

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.

CalChris6• 7 years ago

For QSBS, you have to own the stock. Granted means you can vest the options over time. Vested means you can exercise the options. Exercised means you own the stock.

abuehrle• 7 years ago

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.

CalChris6• 7 years ago

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.

dvduval• 7 years ago

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

ahelwer• 7 years ago

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.

walshemj5• 7 years ago

And given the preponderance of traditional liberal arts types in the City and Wall Street your basing this assertion on ?

dang5• 7 years ago

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

walshemj5• 7 years ago

So steeples fingers exactly why do you think its wrong to reward risk - there are good economic reasons for taxing capital gains differently to income and its due to the increased risk.

Or do you have a political argument against this? don't forget this is not just the Zuckerberg's of this world its ordinary developers like you and me

divyahansg• 7 years ago

Does QSBS kick in if the company is valued at < $50M or has raised < $50M at the time of exercise?

CalChris6• 7 years ago

Aggregate gross assets.

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

Qualified Small-Business Stock rule helps Silicon Valley workers save millions

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