Shareholder Requirements and Limitations
Eligible Holder of QSBS
Any entity except a C corporation can hold QSBS. Eligible shareholders of QSBS include individuals, trusts, estates, partnerships, LLCs — taxed as a partnership or single-member — and S corporations. For pass-through entities, additional requirements must be satisfied for the non-corporate owners of the pass-through entity to qualify for beneficial QSBS treatment. For example, when a pass-through entity holds and sells QSBS after the five-year holding period, only the members of the pass-through entity that were members at the time the pass-through entity acquired such stock shall be eligible to claim their proportionate share of the QSBS gain exclusion.
Holding Period
The stock must be held for more than five years before it can qualify for the QSBS exclusion. Generally, the holding period begins when the stock was issued, but there are some particular rules when the stock is issued in exchange for non-cash property or conversion of other stock. This holding period can be “tacked” to previous holding periods where the stock was received as a gift, from inheritance after death, or as a distribution to partners from a partnership.
If this five-year holding period requirement cannot be satisfied and the holder must sell its stock, proceeds from the sale of otherwise eligible QSBS can be rolled over into other QSBS under I.R.C. Section 1045. These rollover proceeds can then qualify for favorable QSBS treatment once they satisfy the five-year holding period requirement.
Original Issuance
The eligible shareholder must have acquired the stock on original issuance (i.e., the stock cannot be purchased from another shareholder). The stock does not have to be issued by the company as part of its initial formation. Additionally, the taxpayer who originally issued the stock must be the holder and ultimate seller of the QSBS for it to qualify for tax exclusion treatment. Much like the holding period requirement, there are exceptions for QSBS received as a gift, from inheritance after death, or as a distribution to partners from a partnership.
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