QSBS Appreciation Cap: Understanding the Maximum Valuation Limits for Company Exits
What’s the limit in appreciation for QSBS, specifically top line valuation of the company at exit?
While there is no specific limit on the amount of appreciation for QSBS (Qualified Small Business Stock), there are limits on the amount of gain eligible for capital gains tax exclusion under Section 1202 of the Internal Revenue Code.
According to Section 1202, an eligible taxpayer can potentially exclude the greater of the following amounts:
$10 million, reduced by the total amount of eligible gain excluded by the taxpayer from the same issuer in the past or;
10 times the aggregate adjusted basis of the QSBS disposed of by the taxpayer in the same year.
These exclusion limits apply on a per-issuer basis, meaning the limits are not affected by the top-line valuation of the company at exit, but rather by the taxpayer's investment made in each issuing company.
To summarize, the appreciation or the exit valuation of a company does not put a fixed limit on QSBS gains. However, the eligible gains for exclusion under Section 1202 are subject to the limit of $10 million or 10 times the adjusted basis of the QSBS, whichever is greater. As always, it is essential to consult a tax expert familiar with your specific situation to ensure proper evaluation and tax planning.