COMBINING QUALIFIED SMALL BUSINESS STOCK WITH OPPORTUNITY ZONES
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One reason QSBSs have not been particularly popular is that they are C corporations not partnership or pass-through entities . However , the Tax Reform Bill of 2017 did at least create a tax benefit associated with investing in a C corporation . C corporations now enjoy not only a 21 % federal tax rate but have an unlimited ability to deduct state and local taxes .
There are several businesses that cannot qualify as a QSBS . These include any corporation in the fields of : ( 1 ) health , law , engineering , architecture , accounting , actuarial science , performing arts , consulting , athletics , financial services and brokerage services ; ( 2 ) banking , insurance , leasing , financing , investing or other similar businesses ; ( 3 ) farming businesses ( including raising or harvesting trees ); ( 4 ) any business operating a hotel , motel , restaurant or similar business ; ( 5 ) any business where at least more than 10 % of the assets consist of portfolio , stock or securities ; and ( 6 ) as mentioned earlier no matter what the business consists of the QSBS must be engaged in any active conduct of a trade or business .
Importantly , a QSBS can be owned by an individual , trust , partnership , LLC , or an S corporation . A QSBS cannot be owned by another C corporation .
QUALIFIED OPPORTUNITY ZONE RULES
from the sale of QSBS from the list of tax preference items ( in the Protecting Americans from Tax Hikes Act , signed on Dec . 18 , 2015 . Initially , part of the Revenue Reconciliation Act of 1993 Section 1202 provides for a full exemption of either the greater of $ 10 million or 10 times an investor ' s tax basis on the sale of a QSBS . The requirements of a QSBS are as follows :
• It must be a C corporation and not an S corporation or partnership entity like an LLC .
• The shares must be held for at least five years .
• The QSBS shares must be acquired from the original issuer or from a broker on behalf of an original issuer .
• The C corporation must have less than $ 50 million aggregate gross assets at the time of issuance and immediately thereafter .
• At least 80 % of its assets must be used in the active conduct of a trade or business during substantially all of the taxpayer ’ s holding period .
• At least 90 % of the real property owned by the C Corporation must be used in that trade or business .
DEFERRAL OF GAIN FOR QSBS
Even if the QSBS shares are not held for five years but are held for more than six months , an investor can defer the gain associated with the sale of the QSBS by reinvesting the gain in another QSBS within 60 days .
Opportunity Zones are generally low-income areas designated by the Treasury Department . There are OZs in every state and California has more OZs than any other state . The tax benefits associated with investing in an OZ include the following : ( 1 ) capital gain is deferred if generally invested in a Qualified Opportunity Zone Fund ( QOF ) within 180 days of the gain being recognized ; ( 2 ) 10 % of the gain is forgiven if invested in by the end of 2021 and the QOF is held on Dec . 3 , 2026 ; ( 3 ) gain earned within the QOF Fund is not subject to tax if the QOF is held for at least 10 years .
Investing in a QOF requires certain provisions be satisfied ; ( 1 ) the investor must contribute capital gain within 180 days of recognition to a QOF Fund or 180 days of a year end if the gain comes through a Schedule K-1 , such as from a trust , partnership , LLC or S corporation ; ( 2 ) the QOF must then invest at least 90 % of its assets in a Qualified Opportunity Zone Business ( QOZB ) by a bi-annual testing date ; ( 3 ) the QOZB must be acquired solely for cash at original issue .
A QOZB may own either real estate or an operating business . Although most of the literature focuses on the requirements for real estate , since a QSBS must be engaged in an active conduct of a trade or business , the rules for operating businesses become relevant . These rules are : ( 1 ) at least 70 % of the QOZB assets must be used primarily in an OZ ; ( 2 ) at least 40 % of its intangibles must be used in an OZ ; and ( 3 ) at least 50 % of its income must be earned within an OZ . On the last requirement , the IRS regulations create three safe harbors which can be satisfied : ( 1 ) at least 50 % of the employee and independent contractor working hours come from an OZ ; ( 2 ) at least 50 % of the amount paid to the employees and independent contractors are for services performed in an OZ ; ( 3 ) the tangible property of the QOZB and
OPPORTUNITYZONE . COM