Wealthyist E35 | Understanding How OBBBA Affects QBI & QSBS (PT 2)

In this week's episode of the "Wealthyist" podcast, hosted by Dr. Brian Jacobsen, Chief Economist at Annex Wealth Management, with guest Brian Lamborne, Senior Wealth Strategist at Annex Private Client, discussion focused on Qualified Small Business Stock (QSBS) and comparisons to the Qualified Business Income Deduction (QBID) from their previous episode. Here's a summary: QSBS applies to stock in a C corporation that has spent most of its life as a C corporation. Unlike QBID, which is a deduction for pass-through entities (e.g., partnerships, S corporations), QSBS offers an exclusion of capital gains when selling the stock of a qualifying C corporation.Key Differences:QBID: Provides a deduction (up to 20%) on income from pass-through entities, beneficial for businesses generating ongoing cash flow.QSBS: Offers a capital gains exclusion (up to 100% depending on holding period) when selling C corporation stock, ideal for businesses planning a sale.QSBS Rules:The business must be a C corporation at issuance and for most of its life, though it can temporarily elect S corporation status.The company’s gross assets cannot exceed $50 million (increased to $75 million under new rules) at the time of stock issuance.Certain businesses (e.g., hospitality, professional services like doctors or lawyers, or investment companies) do not qualify.Stock must be acquired directly from the company (e.g., through capital infusion or stock options), not purchased from another shareholder.Holding Period Changes: The "One Big Beautiful Bill" modified QSBS rules, reducing the holding period for exclusions:Old rule: 5 years for 100% capital gains exclusion.New rule: 4 years for 75% exclusion, 3 years for 50% exclusion, providing more flexibility.The exclusion cap increased from $10 million to $15 million in gains.Strategic Considerations:Switching between C and S corporation status to game the system is risky and could lead to losing QSBS benefits, as the IRS enforces rules to prevent abuse.Businesses can start as partnerships or sole proprietorships and later convert to C corporations, but tax implications must be carefully planned.Planning early is critical, as choices made at incorporation (e.g., C vs. S corporation) can limit future options.Takeaway: QSBS and QBID serve different purposes depending on whether a business owner prioritizes income deductions or capital gains exclusions. Due to the complexity, consulting with wealth strategists early is essential to maximize benefits.