Shares that might otherwise be eligible for QSBS status may lose their status retroactively if certain events or actions take place after issuance.
For example, subsequent transfers of otherwise eligible QSBS shares can often disqualify those shares from QSBS benefits in the hands of the transferee (see Secondary Sale). In addition, however, certain actions taken by the issuing corporation can also disqualify outstanding shares from QSBS status.
One of the ways that corporations “lose” QSBS status for their shareholders is by redeeming shares of their own stock. If the corporation makes a “significant” redemption of shares, no shares issued by the corporation within one year before or after the significant redemption can be QSBS eligible. For purposes of determining whether a redemption is significant, the IRS aggregates all redemptions within a rolling 12-month period; so corporations should review all redemptions made in the past 12 months before making a redemption. Further, certain redemptions will disqualify from being QSBS eligible any shares purchased by the person from whom the corporation is redeeming the stock within two years of such redemption.
In order for its shares to qualify for QSBS treatment with respect to a holder, a corporation must use at least 80% of its assets (by value) in the active conduct of one or more qualified trades or businesses during substantially all of the holder’s holding period. This means that if a corporation holds too much of its assets in cash (subject to certain exceptions for R&D and start-up activities), passive real estate or investment securities, its stock may lose QSBS status.
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