One of my favorite nuggets from the conference last week was how you can potentially push the QSBS exemption far beyond $15 million through effective basis planning.

This post assumes a basic understanding of QSBS and the latest exclusion limits, which are generally the greater of:

• $15 million of gain, or
• 10x your adjusted basis in the QSBS stock

Most founders end up relying on the $15 million exclusion because they started the company with very little basis. While trust planning can sometimes multiply the exclusion amount, it often comes with tradeoffs around control, flexibility, and complexity.

One strategy I heard discussed was starting the business as an LLC taxed as a partnership or sole proprietorship and converting to a C corporation before a major liquidity event.

The idea is that if owners have accumulated meaningful tax basis prior to conversion, the resulting QSBS stock may have a significantly larger basis than a founder who started a C corporation with only a nominal capital contribution.

Under the latest rules, corporations generally must have aggregate gross assets of $75 million or less at the time the stock is issued to qualify for QSBS treatment. That means the potential exclusion under the 10x basis rule can become extraordinarily large in the right circumstances.

The caveat is that basis planning is highly technical. The relevant number is generally tax basis, not fair market value, and there are numerous rules, limitations, and anti-abuse doctrines that can apply.

The longer I do this, the more I realize that estate, tax, and business attorneys are often the biggest needle movers when it comes to preserving wealth.

The tax savings from successful QSBS planning can be enormous.

I’m out of my depth here, so if this applies to you, talk with a qualified QSBS attorney. At a high level, examples of legitimate planning may include:

• Contributing cash to a new C corporation.
• Contributing assets with substantial tax basis under Section 351.
• Converting an LLC taxed as a partnership into a C corporation after accumulating meaningful basis.
• Structuring a conversion before a major liquidity event while satisfying the QSBS requirements.

Where practitioners get concerned is what is often referred to as “basis stuffing” - transactions designed primarily to inflate basis without a corresponding economic investment or business purpose. Examples may include:

• Circular cash movements.
• Temporary asset contributions.
• Contributing assets unrelated to the business solely to increase basis.
• Last-minute transactions immediately preceding a sale.
• Transactions vulnerable to economic substance, step transaction, or other anti-abuse doctrines.