Silicon Valley tax trick helps investors save big

While former Vice President Joe Biden made headlines for using a loophole in the tax code to save big on his tax bill, savvy Silicon Valley investors and workers have a few tricks up their sleeve as well.

A tax code provision regulating Qualified Small Business Stock (QSBS) is key for some of these individuals to save on gains realized.

The provision applies to investors in companies that, first and foremost, have gross assets valued at $50 million or less at the time the investment is made. People in this position are, in some cases, able to completely write off federal taxes on the first $10 million or 10 times the basis of the investment, whichever is greater.

“It’s a terrific benefit if you qualify,” Bill Smith, managing director for CBIZ MHM’s National Tax Office, told FOX Business.

In order to qualify as QSBS, the company must be a C corporation. The stock must have been issued after August 10, 1993, and must have been acquired directly from the issuing corporation or its underwriter. The qualifying stock must be held for more than five years.

Among several other stipulations, the company must also be engaged in a qualified business or trade, which excludes a number of fields including health, law, engineering, architecture and financial services. But most technology companies would qualify.

Smith noted that most people are likely to qualify for the 100 percent exclusion – which just requires that they received their stock after September 2010 (before that time the exclusion was typically 50 percent).

It’s also important to note that the company’s gross assets can exceed $50 million after a person acquires shares.

Investors, therefore, have the ability to save millions in taxes on their gains.

This could be a big help to employees at startups, who often get a share of their company’s stock. It also benefits people who get in early on a company going public, Smith noted.

The rules were designed to encourage investment in certain small businesses.


The good news for investors? The provision does not appear to be going away anytime soon.

Smith said he hadn’t heard a “peep” about it being under scrutiny, as lawmakers focus their efforts on other parts of the tax code.