Will treasury investments affect my ability to claim the QSBS tax benefit?

What is the Qualified Small Business Stock (QSBS) tax benefit? 

The Qualified Small Business Stock benefit is a tax incentive that allows founders to exclude a portion of capital gains from their federal income tax filings when they sell qualifying stock, assuming certain conditions are met. This can result in tax savings for founders.

What are the requirements to qualify for QSBS? 

It’s important to note that to qualify for this tax benefit, businesses must meet specific requirements: 

• Your business should be a C-corporation and incorporated in the U.S.
• The corporation’s total gross assets must not exceed $50 million before or immediately after the stock issuance. 
• The corporation must allocate, at minimum, 80% of its assets to active business operations.

Can investing in treasury accounts affect investors’ QSBS status? 

As a general point, the mere act of investing in treasury will not automatically disqualify investors from being able to claim the QSBS tax benefit. 

Managing working capital is important to your business's growth, and investing in short-term investments like treasury bonds is a common approach. But if you aren't careful with how you manage these investments, you run the risk of jeopardizing the ability to qualify for the QSBS incentive.

This is where the requirements noted above come into play. 

How to avoid impacting QSBS status while investing in treasury bonds

The requirement of allocating 80% of the corporation’s assets to “active business operation” is critical in maintaining your ability to claim QSBS. 

The IRS wants businesses to avoid parking their capital for an extended period with no clear intentions of reallocating it into the business. If most of your investments are in passive holdings such as index funds, you could risk QSBS status. So, if a significant amount of the company’s assets are held in treasury accounts for an extended period of time, the IRS may start to question whether or not you’re reaching the bar for “active business operations.”

However, given that treasury bonds are typically held for a short time, four to 52 weeks, as long as the gains from those investments are used within two years, this approach may help maintain QSBS eligibility.

Otherwise, it may be considered a passive investment and risk your ability to claim the tax incentive. 

To recap:

• The Qualified Small Business Stock benefit is a tax incentive that allows founders to exclude a portion of capital gains from their federal income tax filings when they sell qualifying stock.
• Simply investing in treasury securities or maintaining an account does not impact your QSBS status.
• This is provided those funds are held and invested back into the business in under two years. 

Aprio is here to help

Aprio is a CPA-led business advisory firm with offices all over the U.S. that assists founders with tax credit questions. With a tailored approach to each of their clients, Aprio works to identify appropriate tax planning and prep strategies for you.

Learn more about Aprio here. 

Manage your idle cash with Rho Treasury

If you're looking to invest your idle cash, then Rho Treasury offers treasury investments designed to help balance security and returns for your business.

“Diversification was important to us. We looked at three to four different platforms but wanted multiple ways to access our capital, and Rho offered the seamless setup, integration, and treasury we were looking for.”—Emma Nelson, COO at MUD\WTR on Rho Treasury

With it, growth-focused startups can invest in government-backed treasury bills with 2-3 business day liquidity, seek competitive yield opportunities, and monitor their balances in real-time. 

Learn more about Rho Treasury. 

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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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Testimonials reflect individual customer experiences and opinions and are provided for illustrative purposes. There is no guarantee that your Rho experience will be the same and results may vary.

Investment management and advisory services provided by RBB Treasury LLC dba Rho Treasury, an SEC-registered investment adviser. RBB Treasury LLC facilitates investments in securities: investments are not deposits and are not FDIC-insured. Investments are not bank guaranteed, and may lose value. Investment products involve risk and past performance does not guarantee future results. Registration with the SEC does not imply a certain level of skill or training. Treasury and custodial services provided through Apex Clearing Corp. Treasury and custodial services provided through Interactive Brokers LLC for clients with accounts opened prior to July 2024; IBKR rates may vary from Apex rate shown above. The yield may change at any time and without prior notice. Please see the ADV Wrap Fee Brochure for further information regarding fees and Rho Treasury.