Qualified small business stock refers to stock that qualifies for the tax deduction for investments in small business stock. For qualifying stock from a C corporation, the owner may deduct up to 100% of the income from the stock, representing a major tax deduction. For stock purchased after the enactment of the Creating Small Business Job Act of 2010, 100% of income may be deducted, but stock purchased before this Act, only 50-75% may be deducted.
However, in order to take the deduction, the investor must meet multiple criteria, some of which remain unclear. First, small business stock must be held for at least five years in order to receive the deduction. Second, the business must have assets worth less than fifty million dollars at the time the stock was purchased; the stock will still qualify for the deduction if the assets become valued at fifty million after the stock was purchased. Once a business reaches the fifty million cap, their stock issued later can never qualify for the deduction even if valuation falls below the cap. Thirdly, the stock must be purchased at original issuance which means, with a few exceptions, that the stock must be purchased directly from the business.
To see the text of the qualified small business stock deduction, click here.
[Last updated in May of 2022 by the Wex Definitions Team]