See your QSBS tax status on your dashboard

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If you have equity in a private company, you may already know how complicated and expensive the taxes can be. But there’s one piece of the tax code that exists to make startup shares more affordable. The qualified small business stock (QSBS) exemption may apply to you and your startup. An amendment to the U.S. tax code, the QSBS exclusion is intended to help reward the people who put in effort and investment to help build startups. 

Here’s how QSBS works: If you received stock in a private company when it had less than $50 million in gross assets––whether as a founder, employee, or investor––and you’ve exercised and held those shares for at least five years, the QSBS exclusion exempts you from having to pay capital gains taxes if you choose to sell those shares. It’s a way the system encourages and rewards risk-taking, and it’s recently been a topic of discussion as Congress weighs reducing its scope.

Starting with 409A valuations initiated in November 2021, customers who use Carta for their 409A valuations can see whether their company’s employees and investors may be eligible to take advantage of these critical tax savings—right from their dashboard.

Making QSBS eligibility less complicated 

The process for determining QSBS exclusion eligibility is onerous and filled with red tape. You’re only eligible for the QSBS exclusion if the issuer––the company you work for, founded, or in which you’re an investor––meets all four criteria at the same time:

  1. Its gross assets were $50 million or less at the time the equity was issued to the stockholder
  2. It’s still an active business
  3. It’s registered as a C corp
  4. It doesn’t operate in excluded industries, such as restaurants or consulting

For example, let’s say an employee has two equity grants issued by your company: one from when they first joined, and one they received later on. They received the first grant when the company had gross assets of $30 million, and the second grant when the company’s assets were $150 million. It’s possible that only the first grant is eligible for the QSBS exclusion if the employee were to sell those shares today. Carta’s new QSBS status feature can help employees easily see which grants might be eligible. 

Meanwhile, if your lawyer or tax advisor does not have access to the right paperwork from the company’s finance team or has trouble monitoring the stock issuer’s valuation over time, you, as a stockholder, could miss out on significant tax savings. And not everyone has a lawyer or tax advisor. Most employees at startups likely don’t know the right questions to ask when it comes to QSBS. 

Now, you can see whether shares you own may be QSBS-eligible right from your Carta dashboard.

If your company is a customer of Carta’s 409A valuation product, your shareholders can now  see whether they may qualify for the QSBS exclusion. 

We use your latest 409A valuation information to determine whether certain shares of your company may qualify for QSBS treatment. We also show each of your shareholders the status of each of their equity grants.

That means that if a shareholder has multiple equity grants on Carta, we show you which ones may be eligible for the QSBS tax exclusion. 

How it works 

Employees

If you own shares in a qualified small business, but haven’t yet held onto them for five years, you’ll see a “QSBS eligible” tag in your portfolio.

QSBS dashboard on Carta

If you have held onto qualified small business stock for at least five years, you’ll see a “QSBS” tag in your portfolio.

QSBS badge on Carta

When you expand to view the stock certificate, a new “QSBS status” field will show you for how long you’ll need to hold onto your shares for you to benefit from the QSBS exclusion if you were to sell the stock. (By the way, we encourage you to confirm with your tax advisor before making any decisions.)

QSBS status field on Carta

Investors, founders, and equity administrators

If Carta identifies your company as a qualified small business, a new badge will appear on your 409A dashboard.

On your Carta 409A product dashboard, we’ll show you the dates during which shares from a specific security may have been eligible, or may still be eligible, for the QSBS exclusion. That’s because Carta valuation analysts monitor QSBS eligibility whenever valuations are conducted, which are once a year or during a material event.

What you can do now

With QSBS information more readily available, the equity owners in your company can have more informed discussions with their tax advisors about their equity ownership. 

If your company is not already using Carta for your 409A valuations, now is a great time to join. 409A valuations are included in your Carta subscription cost, and the QSBS assessment is free for all 409A customers. (If you’re an employee, ask your company’s equity administrator if your company subscribes to Carta’s 409A valuation service so you can better understand if your stock is eligible for this tax benefit.)

DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”).  This communication is for informational purposes only, and contains general information only.  Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2021 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.

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