June 14, 2021

The Qualified Small Business Stock Opportunity Attracts Investment Leading to Tax Savings in Healthcare

By Michele Lipson, Partner, Tax & Business Services

The Qualified Small Business Stock Opportunity Attracts Investment Leading to Tax Savings in Healthcare Healthcare

Investments in small healthcare businesses can be accompanied by significant tax advantages for qualifying investors.

Many investors in search of opportunities are starting to take note of the generous tax treatment available to them by backing qualified small businesses (QSBS) (IRC Section 1202).

Holding qualified small business stock (QSBS), per IRC Section 1202, allows for gains of anywhere from 50 to 100 percent to be excluded from tax obligations depending on the date the stock was acquired. The exclusion is generally limited to the greater of $10 million or 10 times the taxpayer’s basis in the stock. With proper planning, entrepreneurs may be able to fully avoid paying federal tax on qualified gains.

To qualify for this designation, a number of requirements must be met. The stock must be:

  • Issued by a domestic C-corporation with less than $50 million of gross assets at the time of issuance.
  • Issued by a corporation that uses at least 80 percent of its assets (by value) in the active conduct of a qualified trade or business, other than in certain personal services and other types of specified businesses.
  • Issued after August 10, 1993.
  • Held by a non-corporate taxpayer.
  • Acquired by the taxpayer on original issuance.
  • Held for more than five years.

While the benefits of this exclusion can be significant, it is important to understand that one of the exclusions of a “qualified” business might lead those interested in investing in the healthcare industry to conclude that there aren’t any opportunities.

As stated in the tax code, disqualified businesses include “any trade or business involving the performance of services in the fields of health, law, engineering, accounting…where the principal asset of such trade or business is the reputation or skill of one or more of its employees.”

Though physician practices are excluded, a careful review of the rules reveals that many other types of healthcare businesses could qualify for these generous benefits.

For example, companies in the pharmaceutical sector and other healthcare segments that do not provide services directly to patients may be able to qualify for these significant tax benefits. Such businesses may include medical device companies, R&D companies, back-office service providers and healthcare technology companies. Investment opportunities in these areas are expanding as such are more conducive to investment.

Be sure to do the proper planning to determine if your business can take advantage of this valuable tax savings opportunity. If you qualify, you may appeal to a broader range of interested investors. Marcum’s team of healthcare tax specialists are able to assist with the analysis and planning.