QSBS on Reddit: “Is QSBS Worth it?”

When running an exact search for “QSBS”, Google only returns about 153,000 results. Compared to the 2.63M+ results that appear for other popular tax saving strategies like the “1031 exchange”, QSBS resources fall way short. Over the past two decades, Reddit has become a place to find information on all manner of topics, including tax mitigation and liquidity planning. Below we dive into a popular QSBS-related thread from a little over a year ago.

This Redditor has a classic late-stage tax dilemma: their ten-year-old, highly profitable business was formed as an S-Corp (a passthrough tax structure), and with a potential $35M sale on the horizon, they’re realizing they forfeited the chance to qualify for QSBS’s tax exclusion by not issuing stock as a C-Corp. Now they’re wondering whether converting to a C-Corp this late in the game could still make financial sense over the next five years, or whether the ship has sailed.

The main benefit of a conversion to a C-Corp in this case would be to eventually qualify for a tax-free sale in in the future. If this Redditor takes home half of the $35M sale, their tax bill would likely be $4M, or more. A conversion is certainly worth considering if the stars align.

In our experience one of the prominent barriers for late stage businesses executing this strategy is that they actually aren’t in an industry that is well suited for QSBS. One of the requirements to trigger QSBS is a sale of stock. Many businesses that start and persist as passthrough structures fail the eligible business category test or are in fields where asset sales are the more common way of structuring a deal. Of course, tons of great businesses are set up as S-Corps, but in our experience, almost all of the conversion questions we’ve seen result in a determination that a stock sale would result in less favorable exit outcomes for the business owner. That would be our first line of consideration.

The second and probably more interesting question to ask is whether or not the seller intends to own the newly issued stock for 5 years to qualify for the gain exclusion. As the reply above suggests, unless you plan to hold for 5 years, a conversion would be a moot point. QSBS Rollovers are a unique tool here as they allow for the possibility of a sale, and a subsequent deferral of taxes by rolling over proceeds into new QSBS. Effectively, taking advantage of rollovers allows a stock-seller to be freed from the 5-year holding expectation, providing more flexibility to justify an “early” sale.

One big complaint from many advisors about QSBS Rollovers is that they are hard to execute, can be risky (reinvesting into a brand new company and re-risking capital), and may be time consuming to manage. Given the relative infrequency of rollover transactions, a compounding barrier is that most advisors aren’t even aware of the opportunity.

These barriers and concerns are exactly the problems we solve at QSBSrollover.com. We help founders execute, document, and manage a QSBS Rollover without risking unnecessary capital and with full control along the way.

The short answer to the user’s question is that QSBS is almost always worth it. The potential tax savings (not just deferral) is one of the largest tax breaks in the US tax code. Even when all of the criteria (like holding period) are not met, expert advisors can help to maximize the QSBS benefits, give founders access to immediate liquidity, and functionally de-risk the process of structuring, exiting, or rolling over QSBS.