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Qualified Small Business Stock (QSBS): Definition and Tax Benefits

With so many promising companies still in the early stages of growth, qualified small business stock (QSBS) offers everyday investors a unique opportunity to back businesses they believe will become the next big thing. Even better, the tax advantages of QSBS make it an attractive option for investors looking to minimize taxes while supporting startups with low initial investments.

If you’re new to QSBS, here’s what you need to know to fully understand the tax benefits of qualified small business stock and how you can take advantage of them.

💡 Breaking Down QSB Stock

Qualified small business stock (QSBS) refers to shares issued by qualified small businesses as defined under Section 1202 of the Internal Revenue Code. This stock must be purchased after August 10, 1993, from domestic C corporations with assets under $50 million soon after the stock issuance.

✅ Qualified Small Business Eligibility Provisions

Not all industries qualify for QSBS. Eligible companies typically operate in fields like retail, manufacturing, and technology. However, sectors like hospitality, professional services (law, healthcare, etc.), agriculture, mining, and finance (banking and insurance) are excluded. To remain eligible, the business must actively use at least 80% of its assets in qualified operations and retain C corporation status during the investor’s holding period.

QSB Tax Benefits in 2024

If you invest in QSBS, here’s what you stand to gain:

📌 100% exclusion from U.S. federal capital gains taxes
📌 100% exclusion from the alternative minimum tax (AMT)
📌 100% exclusion from the 3.8% net investment income tax (NIIT)

However, for stock issued before September 28, 2010, the exclusion percentages range between 50-75%. Keep in mind there’s also a 28% tax on gains that aren’t excluded and are subject to the NIIT.

❗ Gain Exclusion Limitation

The tax savings under Section 1202 come with a generous cap. Investors can exclude gains up to the greater of \$10 million (or \$5 million for married couples filing separately), or 10 times the combined basis in QSBS sold during the tax year.

QSB Tax Exemption Eligibility Requirements

To claim these tax benefits, you’ll need to meet specific requirements:

✅ You must be an individual, not a corporation.
✅ You must be a U.S. citizen or non-U.S. citizen living in the U.S.
✅ You must have purchased the stock directly from the issuing company, not through a secondary market like the NYSE or NASDAQ.
✅ The stock must be held for at least five years before selling. If you need to sell earlier, you can avoid taxes by reinvesting the profit into another QSBS within 60 days—assuming you held the original QSBS for more than six months.

Does this sound like the right investment for you? Let Insogna CPA help you navigate your QSBS tax planning and ensure you’re getting the maximum benefits. Contact our wealth-building experts today to get started.

Ready to maximize your QSBS tax benefits in 2024?

Whether you’re new to investing or a seasoned pro, our team is here to guide you through the process. Schedule a free consultation today and let’s make your investment work harder for you.

What is Tax Basis and Why Is It So Important?

For tax purposes, “basis” refers to the original value used to measure gains or losses. For instance, if you purchase shares of stock for $1,000, your basis is $1,000; if you sell those shares for $3,000, the gain is calculated by subtracting the basis from the sale price: $3,000 – $1,000 = $2,000. While this is a simplified example, it highlights the core concept of tax basis. In reality, costs like purchase and sale fees are added to the basis, but the principle remains the same. Basis is key when calculating deductions for depreciation, casualties, and depletion, as well as when determining gains or losses on the sale of an asset.

But here’s the kicker: basis isn’t always equal to the original purchase price. It can vary for purchases, gifts, and inheritances. Plus, it’s not static—basis can increase with improvements or decrease due to depreciation or casualty losses. This article will break down how basis is determined in different situations.

📌 Cost Basis – Cost basis, or unadjusted basis, is what you originally paid for an item before any improvements, depreciation, or adjustments due to losses.

📌 Adjusted Basis – Adjusted basis starts with the cost basis (or the value of a gift or inheritance) and includes:

Increases for any improvements (repairs don’t count),
Reductions for depreciation or expensing deductions, and
Reductions for casualty-loss deductions.

Example: You bought a home for $250,000. Then you added a room for $50,000 and installed a solar system for $25,000, plus replaced the windows for $36,000. Your adjusted basis is now $361,000 ($250,000 + $50,000 + $25,000 + $36,000). Repairs and maintenance costs like repainting don’t count toward your basis.

Example: As the owner of a welding company, you buy a welder and generator for \$6,000. After using it for three years and deducting $3,376 in depreciation, you sell it. Your adjusted basis is now $2,624 ($6,000 – $3,376).

📌 Gift Basis – When you receive a gift, you take on the donor’s adjusted basis for tax purposes. Essentially, the donor transfers any potential taxable gain to you.

Example: Your mother gifts you stock worth $15,000. She originally purchased it for $5,000. Your basis is $5,000, and if you sell the shares right away, your gain is $10,000. However, if the gift’s fair market value (FMV) is lower than the donor’s basis and you sell at a loss, your loss will be based on the FMV.

Inherited Basis – When inheriting an asset, the tax basis is generally the FMV on the date of the original owner’s death. In most cases, this results in a “step-up” in basis, which reduces taxable gains for the beneficiary.

Example: You inherit a home with a FMV of $400,000, but your uncle’s original basis was $50,000. Your basis is now $400,000, which is the FMV at the time of inheritance.

The FMV of an inherited asset is crucial when determining gain or loss after a sale. If the estate executor cannot provide this information, it’s essential to get an appraisal. For real estate and businesses, professional appraisers are often required, while for vehicles and publicly traded stocks, online valuation tools can suffice.

This is just an overview of how basis affects your taxes. Got questions about your own situation? We’ve got answers. Contact our office today to get personalized help navigating your tax basis and making sure you’re making the right financial moves for 2024 and beyond.

Ready to tackle your taxes with confidence?

Let’s ensure your tax basis is working for you, not against you. Give us a call today to get the clarity you need to make informed decisions in 2024!

How to Choose the Right CPA for Your Business

The right Certified Public Accountant (CPA) can add immense value to your business, freeing up your time and growing your wealth. But here’s the kicker—not all CPAs are equipped to deliver that level of impact. So, the question is: Is your CPA truly meeting your needs in 2024?

Beyond basic accounting tasks, your CPA should take a proactive approach, implementing tailored accounting solutions that elevate the efficiency and effectiveness of your back office. If this doesn’t sound familiar, it might be time to consider finding a new CPA.

Keep reading to see if your CPA checks all the boxes and what you should prioritize when searching for your next accounting partner.

🗝️ Industry Expertise Is Key

Look for a CPA who has a solid track record in your industry. The right CPA will understand industry-specific tax strategies, credits, and deductions that can save your business serious money. Having someone who already knows the ins and outs of businesses like yours means they can hit the ground running.

🤝 Experience with Clients Like Yours

It’s crucial to find a CPA with experience working with clients similar in size and structure to your own business. A CPA who has dealt with companies of various sizes—from startups to established enterprises—brings a wealth of knowledge that benefits you at every stage of growth. Avoid the long onboarding process by hiring someone who already knows how to handle businesses like yours.

🖥️ Embracing Modern Accounting Technology

Your CPA should be recommending accounting tools that make your life easier. If they’re still pushing outdated systems like QuickBooks Desktop, that’s your cue to raise an eyebrow. In 2024, your business deserves streamlined, cloud-based solutions like QuickBooks Online, paired with expert advice that’s tailored to your financial goals.

➕ Adding Value, Not Just Expense

A CPA should never be seen as an expense—they should be an asset that helps you maximize your profits. The right CPA uses their specialized knowledge to manage your finances efficiently, so you can focus on growing your business. Regular reports, strategic tax planning, and continuous communication throughout the year (not just in April) are must-haves.

✅ Strategic Financial Planning for the Future

Financial strategy isn’t just for Fortune 500 companies—your small business needs it too. If you’re losing sleep over tax payments or budget forecasts, your CPA might not be doing enough. You deserve a CPA that helps you think long-term, ensuring that your business thrives year after year.

A proactive CPA firm can offer you a full range of services, including:

Tailored monthly accounting solutions
Strategic business decision advisory
Cutting-edge accounting technology
Customized financial dashboards
Controller advisory services

The right CPA doesn’t just handle your day-to-day financials; they help you build a future. So, is your CPA really delivering?

Let’s Take Your Business to the Next Level

If you’re questioning whether your current CPA is meeting your business’s needs, it’s time for a change. Contact us today and start working with a team of experts who are dedicated to helping your business succeed in 2024 and beyond.

Am I Eligible for a IRS Tax Penalty Abatement?

There are different types of IRS penalties that can be assessed against you. The most common ones include penalties for failing to file a tax return, filing late, or accuracy-related penalties for incorrectly reporting information on your return. But did you know that in some cases, the IRS offers penalty abatements if you believe you’ve been penalized unfairly?

Civil penalties for underpayment, late filing, or inaccuracies may be eligible for abatement, but criminal penalties for tax evasion or willful violations are not. The first-time penalty abatement program (FTA) is another option available in certain situations. Here’s what you need to know to navigate IRS penalties and determine if you’re eligible for an abatement or the FTA waiver program.

❓ What a Penalty Abatement Doesn’t Cover

Whether you’re seeking a standard penalty abatement or relief through the FTA program, it’s important to note that abatement applies only to the penalties themselves. Interest on unpaid taxes, the tax amount itself, or any processing fees (like installment setup charges) are not covered. If your abatement request is successful, only the interest charged on the penalty would be reduced, not the interest on the taxes owed.

💡 Proving Hardship for Penalty Relief

The failure-to-file penalty applies if you file late or not at all. It’s calculated as 5% of your unpaid taxes per month, up to 25% of the total due. To avoid this, request a six-month extension before the tax deadline if you can’t file on time. While the extension doesn’t waive taxes, interest, or failure-to-pay penalties, it will remove the much steeper failure-to-file penalty.

The IRS does consider penalty abatement requests if you have reasonable cause, like hospitalization, natural disasters, or personal crises. However, simply not having the funds to pay doesn’t count as reasonable cause. If chronic illness, disability, or other long-term hardships have affected your ability to pay, you may be eligible for relief from penalties.

💡 First-Time Penalty Administrative Waiver (FTA Program)

The FTA program is available to waive penalties for failure to file, failure to pay, or failure to deposit if you haven’t been penalized in the past three years or had penalties waived for reasonable cause. If you’re self-employed and have been hit with an estimated tax penalty, this is typically the only penalty the FTA can address.

To qualify, you must be current with all your tax filings and have paid (or set up a payment plan for) any taxes owed. For failure-to-pay penalties, it’s often best to settle the entire balance before requesting the waiver. Unlike standard penalty abatement, you don’t need to prove hardship for an FTA waiver, making it quicker and easier to process.

Curious if you qualify for IRS penalty relief?

Don’t navigate this alone—reach out to our team today. We’ll help you explore your options and work to reduce the financial strain of IRS penalties. Let’s make sure you’re in the best possible position for 2024 and beyond.

Don’t be a Victim: Avoid being Scammed Online!

Tax season is just around the corner, and unfortunately, so are the scammers. These cybercrooks are out to steal your identity, drain your bank account, and maybe even file a tax return in your name. The results? Lost money, a wrecked credit score, financial chaos, and hours of your life spent trying to fix the mess.

The best defense? Don’t take the bait. Scammers will come at you through email, mail, and even phone calls, trying to scare or trick you into giving up your personal information. Here’s what you need to know to stay one step ahead of them.

📌 Steps to Protect Yourself:

✅ Stay vigilant and skeptical. Never open a link or attachment from an unknown or suspicious source. Even if the email looks legit, be cautious—cybercrooks are pros at mimicking trusted businesses, friends, and even the IRS.
✅ Remember, the IRS doesn’t contact you through email. If you get an email claiming to be from the IRS or directing you to a website, don’t click. The IRS doesn’t ask for sensitive information like Social Security numbers, PINs, or credit card details via email, text, or social media. If you receive such a message, contact us before doing anything.
✅ Double-check email addresses. Scammers often spoof email addresses by making small changes. What looks like a message from a friend or company could actually be from a cybercriminal using a similar, but fake, address.
✅ The IRS won’t call to threaten you. If you receive a call from someone claiming to be the IRS and demanding immediate payment or threatening legal action, hang up. The IRS doesn’t operate this way, and they certainly don’t ask for payment via gift cards.
✅ Don’t click on suspicious links. Legitimate companies won’t ask you to update sensitive information through an email link. When in doubt, delete the email and contact the company directly.
✅ Use strong passwords and security software. Keep your online accounts secure with strong, unique passwords and up-to-date security software. Some security tools can even flag suspicious websites before you get scammed.
✅ Use multi-factor authentication. Two-factor authentication adds an extra layer of protection by requiring a second step to verify your identity, usually a code sent to your phone. Even if someone gets your password, they’ll be blocked without the code.
✅ Contact us before responding to any IRS communication. If you receive a letter, call, or fax from the IRS, reach out to us before sharing any information. We can help verify if it’s legitimate.
✅ Educate the elderly. Scammers often target older adults, so make sure your elderly loved ones know how to spot phishing scams and other cyber threats.
✅ “Too good to be true” scams. Scammers might try to trick you by claiming you’ve won a foreign lottery or inherited money from abroad. If something sounds too good to be true, it probably is.

Report Phishing Scams:

If you come across a suspicious email, you can help combat cybercrime by forwarding it to phishing@irs.gov. Every little bit helps in the fight against these cybercrooks.

Find Licensed CPA Firm Near Me

Managing your finances, especially during tax season, is no small task—it’s a job that demands expert guidance. At Insogna CPA, we get it. We’re here to help you navigate the financial maze with the accountability and expertise you deserve. Headquartered in Austin, TX, we proudly serve clients nationwide. Choosing a state-licensed CPA firm isn’t just a smart move; it’s essential to safeguarding your financial future and ensuring you receive the highest level of care, as mandated by the state board.

💡 Investing in Expertise: Why CPAs Are Worth Every Penny

CPAs may charge more, but that’s because their specialized expertise is invaluable. Think of it as an investment in peace of mind. With a CPA, you can rest easy knowing your finances are accurate, secure, and fully compliant.

The Risks of Unlicensed Preparers: Don’t Gamble with Your Finances
Choosing to work with an unlicensed preparer comes with serious risks—errors, fines, back taxes, even audits. Whether you’re an individual or running a business in Austin or anywhere in the U.S., opting for a certified CPA firm is not just a choice—it’s a necessity.

💡 Spotting Fraudulent Operators: Protect Yourself

It’s essential to differentiate between licensed CPA professionals and unlicensed operators. Always verify credentials through your State Board of Accountancy to ensure you’re working with a legitimate CPA firm.

Taking Action Against Fraud: Your Rights
If an unlicensed bookkeeper or tax preparer messes up your return, you’re left without much recourse. Filing a complaint is tough. That’s why working with a licensed CPA, like Insogna, offers the protection you deserve, along with the expertise you need to safeguard your finances.

Ready to Secure Your Financial Future?

Let us help you navigate the complexities of taxes and accounting with ease. Contact Insogna CPA today, and get the expertise you need to stay financially secure in 2024 and beyond. Don’t wait—your peace of mind is just a call away!