- The video discusses the Qualified Small Business Stock (QSBS) tax strategy
- QSBS allows business owners to sell their business and pay no taxes, but it requires a C Corp for at least 5 years
- The strategy doesn't work for most people and is limited to certain cases, such as venture capital or technology companies with little income
- The C Corp structure means paying taxes along the way, which may outweigh the potential tax savings upon selling the business
- The business must also meet certain qualifications to be eligible for QSBS, excluding professional service businesses, banking and finance, real estate, and others
- The video advises caution and suggests considering the likelihood of selling the business for a profit before pursuing QSBS.

- 95% of small business buyers are other small businesses looking to vertically or horizontally integrate and gain market share in a town.
- Buyers prefer asset purchase agreements to reset equipment and assets, as well as amortize goodwill and write off the purchase price.
- Small business owners should consult with Mark Fetzer for fixed pricing on selling a business.
- Buyers are not interested in buying C Corps and prefer to buy assets to avoid higher taxes.
- There are three major hurdles to consider when selling a business.
- The 1202 rule may work in rare cases, such as when a venture capitalist invests in a tech industry company like LinkedIn.
- The QSBS qualification applies at the individual stockholder level, not the company level.
- Business owners can change their tax classification to C Corp and analyze the benefits and drawbacks of QSBS.
- QSBS may not be suitable for startups and may not be the right strategy for Main Street businesses.
- It is important to be educated on both strategies that work and those that don't to protect oneself.

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1. 00:00 - Introducing the QSBS Strategy
2. 06:05 - How Most Small Businesses Operate and the Limitats of a QSBS
3. 09:33 - Understanding EBITDA and Its Role in Valuing a Business
4. 14:15 - Where QSBS Strategy Actually Works
5. 16:20 - Conclusion: The Importance of Being Educated

#QSBS #smallbusiness  #EBITDA #Taxes #avoidtaxes #paylesstaxes #wealth #tax #realestateinvestment #Markjkohler #KKOSLawyers #markjkohlerLIVE #Entrepreneur #rentalrealestate #taxplanning #smallbusiness #taxlaw

The only way you pull this tax strategy off is to have a C Corp for

So if I'm shooting to save 10 million in tax, I want a $10 million valuation, I better be showing at least $2 million of profit in the year before I sell.

That's, my friends, in federal and state corporate tax, that's gonna be a half a million.

I'm gonna have to pay a half a million, close to 25% in taxes to get a valuation of 10 million.

Welcome everyone to another episode of the Main Street Business Podcast.

Mark Kohler here with Matt Sorenson, excited to talk about a strategy that many of you may think is the coolest thing since sliced bread or you've heard about it.

We're going to unpack that for you today, but it's not just strategies you should do.

And I know there's a lot of buzz on there.

You might have seen a TikTok or an Instagram or maybe even a YouTube video about it.

For all you small business owners, do you hear it in there?

You may have heard that 1202 is the same thing, QSBS, and 1202 is the same strategy.

1202 is the IRS code section related to that.

Well, I should say there's a few influencers out there that use this to say, you can save $10 million.

Don't your accountant doesn't know about this.

It's just, it doesn't work for everybody.

So today we're going to tell you why it doesn't work and where it does.

And I'm going to choose, we go, why it doesn't work because for 98% of people it doesn't.

But we'll talk about the 2% where it can work and some of you might be in

Yeah, let's just cut to the chase and talk about why it doesn't work.

Now, there are some applications of this, so we're not going to cramp on it entirely and that's how most tax strategies are overpromoted.

There is a good use case for it, it just doesn't happen to work for most people.

So let me just say, and you guys know us, if you listen to the podcast, you know, we're going to have a problem with this.

The only way you pull this tax strategy off is to have a C corp for at least 5 years.

And you guys know C corporation, when I'm operating that business, what have I decided to pay more taxes than if I had an S corporation, like you're volunteering for the time you operate and own the business to pay more taxes, hoping that When you sell it, you will pay no taxes and that's going to be a better deal.

So just know there's huge baggage up front as you're actually running the business

And some of you, again, you can see, we're going to tell you when a small business could really do well with this.

Let's just think venture capital, maybe a Silicon Valley deal that doesn't have a lot of income.

And we'll kind of talk about that again, that narrow exception where that would be a great business to use this election.

That's Earnings Before interest, tax, and amortization.

Now what that means is, why am I bringing this up?

EBITDA, earnings before interest, taxes, and amortization.

When you go to sell a business, it's gotta get valued.

And so if we're going to sell a business for 10 million dollars, so I can pay no tax on 10 million dollars or more 9 times out of 10 that valuation Is coming from ebita now.

Yeah, maybe you've got Instagram or LinkedIn or Facebook and it has no profit, but it is going to be worth millions, which is going to be 1 in a million that you have that invention that everybody wants that actually hasn't made money.

But for everybody else out there, when you go to sell your C corporation, they're going to look at EBITDA.

What's your profit before you pay off debt and pay taxes and write off goodwill?

Well, if I want a $10 million valuation and we just go with a 5x, which I think is middle of the road.

You may even be as low as a 3 or a 4x on a lot of businesses.

But I have to have $2 million in profit, and a 5x gives me a $10 million business.

So If I'm shooting to save $10 million in tax, I want a $10 million valuation, I better be showing at least $2 million in profit in the year before I sell.

That's my friends in federal and state corporate tax, that's going to be a half a million.

I'm going to have to pay a half a million, close to 25 percent in taxes to get a valuation of $10 million.

So if I'm paying $500 grand in taxes and I had to then year 4 and year 3 and year 2 and year 1, I mean, you add up all those corporate taxes along the way, holy crap, I'd rather pay capital gain and not even play this stupid merry-go-round.

That's a little more detail than maybe you want to admit, I don't know.

when Mark says $10 million, keep in mind, so what is that gain getting you from when I sell my business I'm gonna get capital gain taxes which that rate is 20 percent maybe you're in a state with let's say a 5 percent state income tax could be in 1 with none you know so but you know that's on a 10 million dollar gain right that that saving 20 that could be saving me 2000000 dollars that's that's big I get it we we love that we we want tax strategies they're gonna save you money the problem is and I'm just telling you from someone that's done the 10,000 consults, how many clients, small business clients sell their business for over a million or 2000000 bucks?

But how many of them operate it and make hundreds of thousands or millions a year?

Now so if you have a business that is built to sell And you are like, you're a technology company that doesn't have profit but can still sell for a profit.

You know, there's different areas where this has been a popular strategy.

The main street business owner, what we have seen time and time again is, If they're selling it, it's not a huge gain.

They're more cash flow in the business, running it for years, decades sometimes.

And me trading C-Corp taxes for decades to sell it at 1 day when I'm gonna retire, pass it on to my employees or the next generation, it just doesn't, we just don't see the value of the QSBS strategy and we don't want all the C-corp baggage to get that, maybe I sell it later for a profit sometime down the road.

Problem number 2, it has to be a qualifying business, not only a C-corp, but a qualifying business.

any business is okay except for professional service business.

Law firm, accounting firm, dentist, doctors, gone.

Farming, oil and gas mining, hospitality, real estate, and any other passive business.

So if you've got 1 of these types of businesses, and if you think it'll be banking and finance or professional service, you can't even do this.

So you hear someone talk about it and get you so excited, your business may not even qualify.

And guess what most mainstream businesses are?

Professional service, banking and finance, farming, oil and gas, hospitality, real estate.

Yeah, I mean, maybe, maybe you're you know, this is where we've seen like technology companies, a manufacturing company, construction, maybe there's some things like that, you know, where those are use cases for it and you may want to consider it.

But I think you really have to look at the likelihood of you selling your business for a profit before going out and doing this.

Like you need to scale and obviously be able to grow your business for this QSBS to work.

Now maybe you're someone that's like that.

You're like, I've sold a business before.

And I can see it, okay, let's talk about that.

You know what you're doing, you've done it before, you're with a group of people that do it.

But I just, the reason we don't talk about it as an initial strategy, and it's not on our checklist, of the 30 point tax items on our 30 point checklist when someone comes into our law firm at KQLS Lawyers to do a tax consult, QSBS isn't on it.

We'll talk about it and we'll evaluate it, but the reality is most people don't qualify for it.

So, and then even if they do, the baggage of the C-Corp tax isn't worth it.

to clarify something, Matt, that you said to everybody out there.

A lot of people sell their business for a profit.

And we know that you're going to sell your business for a profit.

But is the profit compared to the cost of getting there is what Matt's saying.

I know what Matt's thinking and say I just want to say it a little differently.

We know you could sell your business for a profit even if it did qualify.

Let's say we get through the qualification.

Is the taxes you paid along the way less than what you might sell it for as a profit big enough, that differential, which you can't predict.

It's called depreciation and amortization.

Buyers, unless you're going private equity, hedge funds, Wall Street, venture capital, they may want to come buy your business.

But 95% of people that are gonna buy your small business are other small businesses.

And they're looking to vertically integrate, horizontally integrate.

They're coming in to buy you so that they can get more market share in your town.

They're a small business owner buying your small business.

They want to hit reset on your equipment and any assets and the goodwill and depreciate them.

They want to write off with what they paid for your business.

If they can't hit reset and get stepped up basis by doing an asset purchase, they're stuck.

Mark Fetzer is our practice group leader in our law firm for small businesses wanting to sell.

If you're thinking of selling and you've been looking at this 1202, make sure you have a consult with Mark Fetzer.

We have fixed pricing to keep it very affordable to sell a business under a million, over a million, or over 10 million.

But what we're going to see from buyers, they want an asset purchase agreement.

And when we're representing a buyer buying a business, and when they have a business owner that's trying to sell it as a small business that's a C Corp, not interested, you know, not interested in buying it.

It's got to be a more institutional or a big company making smaller acquisitions in your space.

It's not going to be another person wanting to take over your small business, you know, that might have a million in profit.

And that, and so that, that, and they don't want to see Corp, they come to me.

I'm like, I don't want you buying that C Corp, just buy their assets.

So what happens is, is you have a lower value.

You're the value you can get out of the business is less because less buyers are likely to go out there and offer.

And in fact, if they could just buy your assets, they pay more.

Of course, Matt's take on it and my take on it, we're just saying it different ways.

This was at our Main Street Tax Pro training this week.

For those that don't know this, over at MarjayCohler.com, I've been a membership of CPAs, enrolled agents, attorneys around the country, joining every month to become certified tax advisors, and we meet twice a week strategizing together.

Well, 1 of our members talked about a perfect example of where the 1202 worked.

He said, I've only seen, this guy's in his 50s, I think he's in his 60s, he says, I've only seen 5 of these in my career that worked.

And there was a client that, venture capital, this is what it works, a venture capitalist was looking to raise money, think of a syndication, private equity, and they went out to accredited investors and said, you want in?

They went on LinkedIn, put in several hundred grand.

But he wasn't a major player in the company.

He was original buyer and original seller.

It was in the tech industry, which qualified as well.

And LinkedIn was not showing a lot of profit when they sold out.

They already knew they were going to be a C corp.

So if you want to go into a deal and you say, I'm going to do a five-year hold, it meets the rules, we do have clients that see that coming and they're like, hey, I'm going to do a 1202 on this on the outside.

You can do a 1202 and everyone else doesn't have to.

You as an investor get to make this election if the company that you invested in meets the criteria.

So he said he his client sold for millions, didn't pay any tax, worked perfectly because it was a venture capital scenario.

So very rare again that you're going to meet your client or you out there that you're going to meet that exception, but if you do, bring it.

You know, you could be in now that Mark mentioned 5 years.

That's this time period that you have to be holding this qualifying small business stock.

So just so everybody knows, it's not the company itself that qualifies as a small business.

Like me owning this stock, I have to qualify as a qualifying shareholder, which you have to be an individual or a trust.

And so Mark's example there with the person in LinkedIn, they were an individual.

Let's say there was a venture capital firm that invested into that company and had stock and it wasn't LinkedIn.

So let's say the VC firms, which there were VC firms that invested into LinkedIn.

So it's at the individual level of who can qualify.

But let's say you are a business owner, and you're like, all right, guys, I actually fit into this, and I wanna go for it.

I'm not ready to sell now, but I might be preparing to sell.

I'm thinking of transitioning my business.

I could get the right type of buyer that would buy C-Corp stock.

I'm hitting all these buttons where I'm a good fit for this.

You can, let's say you're an S-Corp or an LLC, whatever you may be, you can change your tax classification and get over to C-Corp status.

And then you got to make it through that 5 years.

And we want to do an analysis, because this is what we're going to do, and see, all right, what are you giving up?

Because you're going to have 5 years of pain, but you can do some analysis.

And that's where you can just crunch some numbers, look at your state tax situation, because that's going to go into account, corporate taxes are going to be at play now that you haven't experienced before, may not be familiar with.

And so there can be an analysis there, and then you can make a smart determination of whether it applies.

But I think it's a little naive for me to think of people that worry about this even at startup.

And your business might even fail and not even make a dollar, you know what I mean?

And to be thinking, I'm gonna elect into this C-Corp structure, because I want to start a business I can sell, I just think it's not right for Main Street.

We love the S Corp because when that business starts making money, you're going to save taxes every year.

You're going to keep more money in your pocket.

You're not waiting until someday way down the future to get some payoff if you qualify, if you meet all the restrictions and guidelines, and if you've paid your dues paying C-corp taxes along the way.

And I don't want to say we called out the BS in QSBS, but

Well, I want to say this in summary again.

Thank you for listening, and remember, it's really not what strategy you always employ, but which strategy you avoid that could create some problems on the back end.

And we want to be able to talk about both sides of those and do it in an educated fashion.

So when someone pitches you on 1202, you're going to go, I'd like to do a podcast on this.

I might review that and send it over to this person and go, really?

And so it's just as important to be educated on the strategies that don't work as it is on the strategies that do work so you can protect yourself.

It's the, yeah, the stuff you don't do that sometimes makes the big difference.

Make sure you've subscribed, by the way, this podcast.

If you're still listening now, you got through a podcast on QSBS section 1202.

Guys, you like this show, subscribe already.

We'll be back next week with another amazing episode bringing you the tax and legal strategies that can make a difference in your life, not just the ones you need to avoid.


Speaker 0: Their QSB is qualified small business. Sounds very enticing. I can sell my business and pay no tax. It requires a C Corp. The only way you pull this tax strategy off is to have a C Corp for

Speaker 1: at least 5 years. C Corp, not good. We're going to pay tax along the way. Let me tell you why. Let's get really technical here.

It's the reason why is EBITDA. So if I'm shooting to save 10 million in tax, I want a $10 million valuation, I better be showing at least $2 million of profit in the year before I sell. That's, my friends, in federal and state corporate tax, that's gonna be a half a million. I'm gonna have to pay a half a million, close to 25% in taxes to get a valuation of 10 million. Welcome everyone to another episode of the Main Street Business Podcast.

Mark Kohler here with Matt Sorenson, excited to talk about a strategy that many of you may think is the coolest thing since sliced bread or you've heard about it. We're going to unpack that for you today, but it's not just strategies you should do. Maybe it's strategies you shouldn't do. Yeah.

Speaker 0: And I know there's a lot of buzz on there. Qualified small business stock, QSBS. You might have seen a TikTok or an Instagram or maybe even a YouTube video about it. And someone hyping this up. For all you small business owners, do you hear it in there?

QSBS, Qualified Small Business. Sounds very enticing. I can sell my business and pay no tax. Tell me more!" Is it true? I don't know.

Speaker 1: That sounds so good. You may have heard that 1202 is the same thing, QSBS, and 1202 is the same strategy. 1202 is the IRS code section related to that. And yeah, there's a lot of influence. Well, I should say there's a few influencers out there that use this to say, you can save $10 million.

Don't your accountant doesn't know about this. Your accountant is a dumb ass. You know what? We do know about it. It's just, it doesn't work for everybody.

It's very, very limited. So today we're going to tell you why it doesn't work and where it does. And I'm going to choose, we go, why it doesn't work because for 98% of people it doesn't. But we'll talk about the 2% where it can work and some of you might be in

Speaker 0: that 2%. Yeah, let's just cut to the chase and talk about why it doesn't work. Now, there are some applications of this, so we're not going to cramp on it entirely and that's how most tax strategies are overpromoted. There is a good use case for it, it just doesn't happen to work for most people. So let me just say, and you guys know us, if you listen to the podcast, you know, we're going to have a problem with this.

It requires a C corp. The only way you pull this tax strategy off is to have a C corp for at least 5 years. Okay. And you guys know C corporation, when I'm operating that business, what have I decided to pay more taxes than if I had an S corporation, like you're volunteering for the time you operate and own the business to pay more taxes, hoping that When you sell it, you will pay no taxes and that's going to be a better deal. So just know there's huge baggage up front as you're actually running the business

Speaker 1: year to year. I love it. And some of you, again, you can see, we're going to tell you when a small business could really do well with this. Let's just think venture capital, maybe a Silicon Valley deal that doesn't have a lot of income. They're not paying a lot of taxes.

And we'll kind of talk about that again, that narrow exception where that would be a great business to use this election. But Matt just brought it up first. C-Corp, not good. We're going to pay tax along the way. Now let me tell you why.

Let's get really technical here. The reason why is EBITDA. That's Earnings Before interest, tax, and amortization. Now what that means is, why am I bringing this up? EBITDA, earnings before interest, taxes, and amortization.

When you go to sell a business, it's gotta get valued. What is that business worth? And so if we're going to sell a business for 10 million dollars, so I can pay no tax on 10 million dollars or more 9 times out of 10 that valuation Is coming from ebita now. Yeah, maybe you've got Instagram or LinkedIn or Facebook and it has no profit, but it is going to be worth millions, which is going to be 1 in a million that you have that invention that everybody wants that actually hasn't made money. But for everybody else out there, when you go to sell your C corporation, they're going to look at EBITDA.

What's your profit before you pay off debt and pay taxes and write off goodwill? Like what is your hardcore profit? Well, if I want a $10 million valuation and we just go with a 5x, which I think is middle of the road. You may even be as low as a 3 or a 4x on a lot of businesses. But I have to have $2 million in profit, and a 5x gives me a $10 million business.

So If I'm shooting to save $10 million in tax, I want a $10 million valuation, I better be showing at least $2 million in profit in the year before I sell. That's my friends in federal and state corporate tax, that's going to be a half a million. I'm going to have to pay a half a million, close to 25 percent in taxes to get a valuation of $10 million. So if I'm paying $500 grand in taxes and I had to then year 4 and year 3 and year 2 and year 1, I mean, you add up all those corporate taxes along the way, holy crap, I'd rather pay capital gain and not even play this stupid merry-go-round. That's a little more detail than maybe you want to admit, I don't know.

Yeah, and

Speaker 0: when Mark says $10 million, keep in mind, so what is that gain getting you from when I sell my business I'm gonna get capital gain taxes which that rate is 20 percent maybe you're in a state with let's say a 5 percent state income tax could be in 1 with none you know so but you know that's on a 10 million dollar gain right that that saving 20 that could be saving me 2000000 dollars that's that's big I get it we we love that we we want tax strategies they're gonna save you money the problem is and I'm just telling you from someone that's done the 10,000 consults, how many clients, small business clients sell their business for over a million or 2000000 bucks? It's not that many. But how many of them operate it and make hundreds of thousands or millions a year? There's a lot of those. Now so if you have a business that is built to sell And you are like, you're a technology company that doesn't have profit but can still sell for a profit.

You know, there's different areas where this has been a popular strategy. The main street business owner, what we have seen time and time again is, If they're selling it, it's not a huge gain. They're more cash flow in the business, running it for years, decades sometimes. And me trading C-Corp taxes for decades to sell it at 1 day when I'm gonna retire, pass it on to my employees or the next generation, it just doesn't, we just don't see the value of the QSBS strategy and we don't want all the C-corp baggage to get that, maybe I sell it later for a profit sometime down the road. Yep, I love it.

Now, problem number 2. That was his first problem, folks. Problem number 2, it has to be a qualifying business, not only a C-corp, but a qualifying business. And the definition of this in 1202 is

Speaker 1: any business is okay except for professional service business. Law firm, accounting firm, dentist, doctors, gone. Banking and finance. Real estate broker. Yeah.

Farming, oil and gas mining, hospitality, real estate, and any other passive business. So if you've got 1 of these types of businesses, and if you think it'll be banking and finance or professional service, you can't even do this. So you hear someone talk about it and get you so excited, your business may not even qualify. And guess what most mainstream businesses are? Professional service, banking and finance, farming, oil and gas, hospitality, real estate.

And so, again, major roadblock.

Speaker 0: Yeah, I mean, maybe, maybe you're you know, this is where we've seen like technology companies, a manufacturing company, construction, maybe there's some things like that, you know, where those are use cases for it and you may want to consider it. But I think you really have to look at the likelihood of you selling your business for a profit before going out and doing this. Like you need to scale and obviously be able to grow your business for this QSBS to work. Now maybe you're someone that's like that. You're like, I've sold a business before.

I've been down that road, you know? And I can see it, okay, let's talk about that. You know what you're doing, you've done it before, you're with a group of people that do it. But I just, the reason we don't talk about it as an initial strategy, and it's not on our checklist, of the 30 point tax items on our 30 point checklist when someone comes into our law firm at KQLS Lawyers to do a tax consult, QSBS isn't on it. It's not on it.

We'll talk about it and we'll evaluate it, but the reality is most people don't qualify for it. So, and then even if they do, the baggage of the C-Corp tax isn't worth it. Well, I want

Speaker 1: to clarify something, Matt, that you said to everybody out there. Yeah. A lot of people sell their business for a profit. And we know that you're going to sell your business for a profit. But is the profit compared to the cost of getting there is what Matt's saying.

I'm going to just unpack. I know what Matt's thinking and say I just want to say it a little differently. We know you could sell your business for a profit even if it did qualify. Let's say we get through the qualification. Is the taxes you paid along the way less than what you might sell it for as a profit big enough, that differential, which you can't predict.

Okay, now here's third problem. Third problem. It's called depreciation and amortization. Buyers, unless you're going private equity, hedge funds, Wall Street, venture capital, they may want to come buy your business. They want stock.

But 95% of people that are gonna buy your small business are other small businesses. And they're looking to vertically integrate, horizontally integrate. They're coming in to buy you so that they can get more market share in your town. They're a small business owner buying your small business. That's 90% of the buyers.

They don't want to buy your stock. They want to hit reset. They want to hit reset on your equipment and any assets and the goodwill and depreciate them. And they want to amortize the goodwill. They want to write off with what they paid for your business.

If they can't hit reset and get stepped up basis by doing an asset purchase, they're stuck. So what do we see in our firm? Asset purchase agreements. Mark Fetzer is our practice group leader in our law firm for small businesses wanting to sell. If you're thinking of selling and you've been looking at this 1202, make sure you have a consult with Mark Fetzer.

We have fixed pricing to keep it very affordable to sell a business under a million, over a million, or over 10 million. We can help you. But what we're going to see from buyers, they want an asset purchase agreement. They want to hit resale. Yeah.

Speaker 0: Yeah. And when we're representing a buyer buying a business, and when they have a business owner that's trying to sell it as a small business that's a C Corp, not interested, you know, not interested in buying it. So who does your buyer have to be? You've got to have a bigger buyer. It's got to be a more institutional or a big company making smaller acquisitions in your space.

It's not going to be another person wanting to take over your small business, you know, that might have a million in profit. And that, and so that, that, and they don't want to see Corp, they come to me. I'm like, I don't want you buying that C Corp, just buy their assets. You want to go in and buy a C Corp. And now you've agreed to pay more taxes.

So what happens is, is you have a lower value. You're the value you can get out of the business is less because less buyers are likely to go out there and offer. And in fact, if they could just buy your assets, they pay more. Now, Let's talk about when it works. Let's go over that.

Speaker 1: I gave 3 major problems. Of course, Matt's take on it and my take on it, we're just saying it different ways. Those are the 3 major hurdles. When does it work? I'm gonna give an example.

This was at our Main Street Tax Pro training this week. For those that don't know this, over at MarjayCohler.com, I've been a membership of CPAs, enrolled agents, attorneys around the country, joining every month to become certified tax advisors, and we meet twice a week strategizing together. Well, 1 of our members talked about a perfect example of where the 1202 worked. He said, I've only seen, this guy's in his 50s, I think he's in his 60s, he says, I've only seen 5 of these in my career that worked. And there was a client that, venture capital, this is what it works, a venture capitalist was looking to raise money, think of a syndication, private equity, and they went out to accredited investors and said, you want in?

And his client went in on LinkedIn. They went on LinkedIn, put in several hundred grand. They were 1 of the original founders. But he wasn't a major player in the company. He was just an investor.

Now- An individual, because

Speaker 0: you have to be an individual, right? Can't be another company. Has to be an individual stockholder.

Speaker 1: No, it was perfect. He was original buyer and original seller. So he followed all the rules. It was in the tech industry, which qualified as well. And LinkedIn was not showing a lot of profit when they sold out.

And so, But it was venture capital too. They already knew they were going to be a C corp. So if you want to go into a deal and you say, I'm going to do a five-year hold, it meets the rules, we do have clients that see that coming and they're like, hey, I'm going to do a 1202 on this on the outside. You can do a 1202 and everyone else doesn't have to. You as an investor get to make this election if the company that you invested in meets the criteria.

So he said he his client sold for millions, didn't pay any tax, worked perfectly because it was a venture capital scenario. So very rare again that you're going to meet your client or you out there that you're going to meet that exception, but if you do, bring it. Yeah, and now you can elect into it.

Speaker 0: You know, you could be in now that Mark mentioned 5 years. That's this time period that you have to be holding this qualifying small business stock. So just so everybody knows, it's not the company itself that qualifies as a small business. It's at the stockholder level. Like me owning this stock, I have to qualify as a qualifying shareholder, which you have to be an individual or a trust.

And so Mark's example there with the person in LinkedIn, they were an individual. Let's say there was a venture capital firm that invested into that company and had stock and it wasn't LinkedIn. It was actually LinkedIn. Yeah. Oh, okay.

So let's say the VC firms, which there were VC firms that invested into LinkedIn. I mean, they can't get the QSBS. Right. So it's at the individual level of who can qualify. But let's say you are a business owner, and you're like, all right, guys, I actually fit into this, and I wanna go for it.

I'm not ready to sell now, but I might be preparing to sell. I'm thinking of transitioning my business. I have good profits. It is a business that could sell. I could get the right type of buyer that would buy C-Corp stock.

I'm hitting all these buttons where I'm a good fit for this. You can, let's say you're an S-Corp or an LLC, whatever you may be, you can change your tax classification and get over to C-Corp status. And then you got to make it through that 5 years. And we want to do an analysis, because this is what we're going to do, and see, all right, what are you giving up? Because you're going to have 5 years of pain, but you can do some analysis.

And that's where you can just crunch some numbers, look at your state tax situation, because that's going to go into account, corporate taxes are going to be at play now that you haven't experienced before, may not be familiar with. And so there can be an analysis there, and then you can make a smart determination of whether it applies. But I think it's a little naive for me to think of people that worry about this even at startup. At startup, you have no idea. And your business might even fail and not even make a dollar, you know what I mean?

And to be thinking, I'm gonna elect into this C-Corp structure, because I want to start a business I can sell, I just think it's not right for Main Street. It's the wrong strategy. We love the S Corp because when that business starts making money, you're going to save taxes every year. You're going to keep more money in your pocket. You're going to save taxes every year.

You're not waiting until someday way down the future to get some payoff if you qualify, if you meet all the restrictions and guidelines, and if you've paid your dues paying C-corp taxes along the way.

Speaker 1: Well said, my friend. Good job, Matt Sorensen. All right, that's it.

Speaker 0: QSBS. We wanted to set the record straight. And I don't want to say we called out the BS in QSBS, but

Speaker 1: you know. If the shoe fits. If the shoe fits. If the acronyms work, they just work. It just works.

Well, I want to say this in summary again. Thank you for listening, and remember, it's really not what strategy you always employ, but which strategy you avoid that could create some problems on the back end. And we want to be able to talk about both sides of those and do it in an educated fashion. So when someone pitches you on 1202, you're going to go, I'd like to do a podcast on this. I might review that and send it over to this person and go, really?

And so it's just as important to be educated on the strategies that don't work as it is on the strategies that do work so you can protect yourself.

Speaker 0: Dang, I love that. That was sage advice right there. Dang, that was good. That was good. It's the, yeah, the stuff you don't do that sometimes makes the big difference.

Love that. Well, thanks everyone for being here. Make sure you've subscribed, by the way, this podcast. Hit that button and subscribe to it. If you're still listening now, you got through a podcast on QSBS section 1202.

Guys, you like this show, subscribe already. We'll be back next week with another amazing episode bringing you the tax and legal strategies that can make a difference in your life, not just the ones you need to avoid. We'll see you then.

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