#55 Qualified Small Business Stock (QSBS) Explained: How Section 1202 Creates Tax-Free Business Exits
Learn how Qualified Small Business Stock (QSBS) unlocks powerful capital gains tax strategies for a tax-free business exit. Discover rules, timelines, and tips to maximize investor returns.
How Qualified Small Business Stock Creates Tax-Free Business Exits
Discover how Qualified Small Business Stock (QSBS) can unlock tax-free exits for founders and investors. In this episode, attorney Dan Baucum of FBFK Law breaks down the tax rules, timelines, and strategies behind Section 1202. Learn how to structure your investments, maximize capital gains exclusions, and avoid costly mistakes when selling your business or stock. Whether you’re planning an exit or building a growth-focused portfolio, this episode simplifies complex tax concepts into actionable insights to help you make smarter, more confident decisions.
Top Takeaways
- QSBS Power: Exclude up to $15M or 10x your investment in capital gains taxes with proper planning.
- LLC vs. C-Corp: Why switching to a C-Corp can benefit growth-focused businesses reinvesting profits.
- 5-Year Holding Rule: Hold QSBS for five years to qualify for a 100% capital gains tax exclusion.
- Stock vs. Asset Sales: Only stock sales qualify for QSBS — asset sales miss out on tax benefits.
- Family Wealth Transfer: QSBS exclusions can be stacked by gifting stock to family members.
- Eligibility: Tech and manufacturing usually qualify; service businesses typically do not.
- Exit Strategy Clarity: Tax planning early can save millions and prevent last-minute deal roadblocks.
Notable Quotes
- “Ask yourself: What are you going to do with the profits? That answer determines how you should be taxed.” – Dan Baucum
- “Qualified Small Business Stock can be a game changer — it’s one of the most overlooked tax planning tools for growth companies.” – Dan Baucum
- “Nine times out of ten, an LLC may be the right answer, but don’t let habit dictate your choice — do the math.” – Dan Baucum
Chapters
- 00:00 – Introduction
Welcome and overview of tax-focused investing strategies. - 01:00 – Meet Dan Baucum
Dan’s background and expertise in tax law and partnership structures. - 04:00 – LLC vs. C-Corp Explained
Key differences and why entity choice matters for investors and founders. - 10:50 – Deciding How to Use Profits
How reinvesting vs. distributing profits influences tax decisions. - 13:56 – QSBS Overview
What Qualified Small Business Stock is and why it matters. - 17:28 – Who Qualifies for QSBS
Eligible industries and common exclusions under Section 1202. - 21:43 – Switching from LLC to C-Corp
How and when to make the transition to qualify for QSBS. - 24:40 – Gross Asset Rules & Growth
Understanding the $75M asset threshold and scaling considerations. - 26:35 – The 5-Year Rule & Partial Exclusions
Timelines to hit 50%, 75%, and 100% capital gains exclusions. - 29:01 – Equity Compensation Benefits
Why C-Corps simplify stock options and employee incentives. - 34:24 – Estate & Gift Tax Planning
How entrepreneurs and investors can integrate QSBS into wealth transfer strategies. - 37:26 – Final Thoughts & Action Steps
Key takeaways and why early tax planning is essential.
Credits
Sponsored by Real Advisers Capital, Austin, Texas
If you are interested in being a guest, please email us.
Disclaimers
“This production is for educational purposes only and is not intended as investment or legal advice.”
“The hosts of this podcast practice law with the law firm, Ferguson Braswell Fraser Kubasta PC; however, the views expressed on this podcast are solely those of the hosts and their guests, and not those of Ferguson Braswell Fraser Kubasta PC.”
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Dan Baucum
Federal Tax Planning and IRS Controversies
Dan Baucum advises clients on federal tax matters impacting business transactions such as acquisitions, mergers, sales, divisions, conversions, and terminations. He has deep experience navigating complex tax issues and is recognized for his work with LLCs, LPs, and S corporations and high-net-worth estate planning. Dan also represents clients in IRS controversies, including administrative matters before the IRS Chief Counsel’s Office in Washington, D.C. His expertise on federal tax issues has been sought in both advisory and expert witness roles, underscoring his command of the field.
Earlier in his career, Dan served as Special Assistant to the IRS Assistant Chief Counsel (Passthroughs & Special Industries). In that role, he reviewed key IRS tax guidance related to partnerships, S corporations, trusts, and estates. Notably, he contributed to developing the built-in gain and disguised sale of property regulations and helped shape the IRS’s “safe harbor” policy for partnership profits interests. He reviewed and drafted numerous proposed regulations, revenue rulings, and private letter rulings issued by the Passthroughs division. After his tenure in government, Dan joined the National Tax Office of an international accounting firm as director, advising on partnership tax issues and IRS procedure. He also taught for four years as an adjunct professor at Georgetown University Law Center’s Graduate Tax Law Program.
Since returning to Dallas, Dan has remained active in legal practice and bar leadership. He… Read More
