There are some businesses that are able to issue stock which entitles the owners to eventually get a tax-free income when these stocks are sold. These stocks are known as qualified small business stock. However, there are a number of rules that you need to know about when it comes to qualified small business stock.

The Business Must Be A C Corporation

The first rule of qualified small business stock is that the company has to be registered as a C corporation. An S corporation will not be able to issue this type of stock. If your business is an S corporation, you need to be careful when terminating this and becoming a C corporation.

The law states that the business has to be a C corporation on the date when the stocks were issued. If you terminate your S corporation to become a C corporation, new shares will have to be issued. It is recommended that you speak with a financial attorney to fully understand the ramifications of this.

The Business Cannot Be In Certain Industries

If your business operates in certain industries, it will not be eligible to issue this type of stock. To qualify, your business will need to be involved in manufacturing, wholesale, technology or retail. You will not be eligible to issue qualified small business stock if your business is in personal services.

Banking, insurance, and financing businesses will also not be eligible. Farming and mining companies are also not allowed to issue the stock. If your business is a motel, hotel or restaurant, you cannot provide these stocks.

The Size Of The Business

Your business will need to have total gross assets of $50 million or less on the date the stock is issued. This limit on assets will be before the stock is issued and directly after the stock is issued. It is important to note that the assets will include any predecessor of the corporations.

This is important if you have a corporation that is a subsidiary of a larger corporation. In these situations, the subsidiary corporation will be grouped together with the parent corporation. All of the assets of the parent corporation will be taken into account with this limit.

The Business Must Be Operating

A corporation will not be eligible to issue this type of stock if it is a holding company. The corporation will need to be engaged in business within one of the eligible industries. It must be shown that at least 80% of the value of assets are being used for active operations.

Stock Must Be Acquired From The Corporation

The stock the shareholders receive must be acquired for cash, as payment for services or for property. If your corporation is qualified as a small business at year end, you will be able to give your employees bonuses in the form of stock. As long as there are no restrictions, the end of year bonus stock is includable in gross income.

There are a number of rules that you need to know about when it comes to qualified small business stock. You need to adhere to the rules in order to offer this stock in a legal manner.