The Tax Advantages of Qualified Small Business Stock (QSBS) in Healthcare

Investors searching for new opportunities in healthcare are noting the generous tax treatment of holding qualified small business stock (QSBS). However, some tax proposals would reduce this benefit; take this into consideration when evaluating this opportunity.

According to IRC Section 1202, QSBS holders can have gains of 50-100% excluded from their tax obligations depending on the date the stock was acquired. The exclusion is generally limited to the greater of $10 million or 10 times the taxpayer’s basis in the stock. Proper planning may enable many entrepreneurs to fully avoid paying federal tax on qualified gains.

Although the QSBS benefit is known to investors in general, small healthcare businesses and investors often assume they’re not eligible. The tax code states that disqualified businesses include “any trade or business involving the performance of services in the fields of health, law, engineering, accounting…where the principal asset of such trade or business is the reputation or skill of one or more of its employees.”

While physician practices are indeed excluded, other kinds of healthcare businesses may qualify for these tax exclusions. Consider investments in the pharmaceutical sector, healthcare R&D companies, medical device companies, back-office service providers and healthcare technology companies. Since these businesses don’t provide direct patient care, all may qualify for this tax benefit.

The IRS code identifies several requirements that must be met to qualify for this tax exclusion. The QSBS must be:

  • Issued by a domestic C corporation with less than $50 million of gross assets at the time of issuance.
  • Issued by a corporation that uses at least 80% of its assets (by value) in the active conduct of a qualified trade or business, other than in certain personal services and other types of specified businesses.
  • Held by a non-corporate taxpayer.
  • Acquired by the taxpayer on original issuance.
  • Issued after Aug. 10, 1993.
  • Held for more than five years.

If your healthcare business qualifies for these tax advantages, you may be able to appeal to a wider range of interested investors. Contact your healthcare CPA to help determine if investors can take advantage of QSBS and its valuable tax savings opportunity!

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