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If Your Compensation Package Includes Stock, You Should Know About This Tax Rule

If you work for a small business or startup and receive shares of stock as part of your employee compensation, ask your accountant about the qualified small business stock tax exclusion.

As The New York Times reports, not all accountants are familiar with this—which is why you’ll need to bring it up yourself, because it might save you a lot of money on your taxes:

"The tax code provision addresses what’s called qualified small-business stock. It says that people who are invested in a company valued under $50 million are eligible to exclude from their taxes $10 million or 10 times their investment, whichever is higher. It can be used by employees at start-ups who are given stock as part of their compensation plans.

There are a few restrictions to the election, in addition to the size of the company when an employee receives shares. Workers must hold the stock for at least five years. And the stock must be in a business that makes something, including tech companies. That, in theory, excludes law offices, accounting practices, financial service firms and other service providers."

In other words, if your stock is considered qualified small business or “QSB” stock, you won’t have to pay taxes on much, if not all, of your stock gain. Here’s how the IRS explains it:

"You generally can exclude from your income up to 50% of your gain from the sale or trade of qualified small business stock held by you for more than 5 years. The exclusion can be up to 75% for stock acquired after February 17, 2009, and no later than September 27, 2010, and up to 100% for stock acquired after September 27, 2010. The exclusion can be up to 60% for certain empowerment zone business stock. See Empowerment zone business stock, later. The eligible gain minus your section 1202 exclusion is a 28% rate gain. See Capital Gain Tax Rates, later."

If that’s confusing, well—that’s why you want to work with an accountant, and why you want to make sure your accountant is familiar with this particular chunk of tax code.

If your previous accountant didn’t inform you of the potential tax savings—or if you did your taxes yourself and missed out—you have three years from the date of your initial tax filing (or two years from the date of your tax payment, whichever comes later) to file an amended return and claim your refund.


This article was written by Nicole Dieker from Lifehacker and was legally licensed through the NewsCred publisher network. 

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this article. 

The views of the author of this article do not necessarily represent the views of First Republic Bank.

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