Qualified Small-Business Stock rule helps Silicon Valley workers save millions | Hacker News Reader

Qualified Small-Business Stock rule helps Silicon Valley workers save millions

nytimes.com

106 pointskbgrant64 comments

It's not a loophole, it's a specific tax break for people cashing out of "small" businesses. ("small" means at the time you joined -- it can have grown huge since.)

QSBS can save you a lot, but it can be a lot of work to file too. I ran up about $20k in accountant bills doing it on a complex deal.

If you're selling founder or early-employee stock, ask your accountant if QSBS is right for you.

Seriously... not a loophole. Explicit tax rule. Just making it look like people are somehow taking advantage of the system. FUD.

To modify an older UK saying "nothing so sanctimonious as a newspaper journalist"

The original is about a certain police force and was by Winston Churchill

Ok, we've replaced 'loophole' with the name of the thing above.

The New York Times headline uses the word “loophole.” It’s not appropriate to rewrite that headline simply because you don’t like it. If “loophole” were an incorrect choice of words it would not be in the headline.

EDIT to add I understand moderation is a thankless job and thank you for doing it. But I disagree with this particular call.

HN title moderation is more consistent than it may appear. It all follows from the guideline: "Please use the original title, unless it is misleading or linkbait; don't editorialize." (https://news.ycombinator.com/newsguidelines.html) Submissions should stick to the original title—submitting an article doesn't confer the right to change it to suit one's opinion. But we make exceptions for misleading titles and linkbait. Given how the internet and media work, we often have to change titles for one or both of those reasons.

When we do, we look for a representative phrase from the article itself that can work as an accurate and neutral title. We only ever make up our own titles as a last resort, which is rare, maybe once a week if that. Sticking to the article's language often ends up being truer to the article than its own headline, because those are often not the author's doing. For example the current NYT article does not say "loophole"; only the headline does. The word the article uses is "provision" and it uses it four times. Presumably the headline writer switched "provision" to "loophole" for obvious reasons: it makes the title more provocative and thus more attention-getting. Normally we'd switch it back, but in this case I ran into HN's 80 char limit, so I squeezed "rule" in instead.

When users start objecting to a title in the comments, we usually acknowledge the objection and apply it to the title: https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme.... HN readers have an eagle eye for inaccuracy, so their objections are usually fair. More importantly though, if we don't do it, the thread will increasingly be about how irritating people find the title. By translating their objection into a concrete edit, we ground out that energy. People feel heard, and the thread can go back to discussing the article itself, which is always more interesting.

Never underestimate the passion users feel about titles. It is a force of nature—I call it 'title fever': https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme.... You cannot fight it, only yield: https://news.ycombinator.com/item?id=17496011. When I started this job, I found that perplexing: why care so much about titles? How is this the most important thing? But I've come to understand it better. Titles are the one thing everybody reads, so they're the one thing we all have in common. It sounds trivial, but they're the most public, most shared space the community has, and so carry the strongest charge. Thousands of lasers are focused on them. They're also small enough that it's possible to understand them and to feel like one can get them right—at least in comparison to anything else. The community's passion for correctness, so frustrated in most other places, ends up pouring into this.

This creates a strongly reinforcing loop on HN's front page. The feeling of HN titles being accurate and neutral—"I want it to be bookish" was what PG originally told me—gets compounded and cements into an expectation that things must be that way. If they're not, strong frustration exerts pressure to make it that way. This is what I mean by force of nature. And when readers see that they actually have influence over this place, like when people object to a title and we change it, they bond with it more closely and the loop gets stronger.

It also gets stronger because of the contrast between HN and other places on the internet, which have to play games to get clicks that we are blessed with not having to play: https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme.... The brain works in contrasts, and the contrast between the neutral HN style and most other places is so sharp that it creates an "ow my eyes" effect going one way and an "ahh" feeling of relief going the other. HN being text-based affects that too: no garish images, no flashing lights, no loud videos. The more often people come here, the more such small contrasts get registered—thousands of them. We're all conditioned now to expect HN's front page to be this way. Coming here should feel like walking into a library.

It's an interesting question what all this emotion that people feel about HN titles, the HN frontpage, and HN itself is really related to. It's far too strong to only be about HN, which is merely an internet forum and basically just an entertainment site.

Dang, I think you've summarised the difference between news and 'news' in three paragraphs wonderfully.

Everyone keeps saying that moderation is a thankless job and I thank you out for it.

But I'd like to take this chance to thank you for the insights that you post. They give me an amazing insight to this teeming mass called humanity and help me see the 'humane' part of it despite everything to the contrary.

In an age of click bait, HN’s title moderation is really fantastic and measured. Thank you.

Excellent points, and excellent work moderating, thanks for all you do.

I think the point about the headlines being the one thing everyone reads is especially important for everyone to realize, and I wish the people coming up with titles would realize and take seriously the huge responsibility they have, not just for the number of clicks they garner, but also the fact that very often people read that as the summary and internalize it as fact. Every time the writers stretch the truth to get more clicks, they’re doing slight harm to huge numbers of people.

Thanks for keeping this corner of the internet a bit cleaner of that.

The problem is systemic. Those tricks work in the short term, forcing everyone to use them. The long term costs are externalities.

HN is in a special position, maybe even a unique one. If it were a standalone business we'd have to optimize for traffic, not curiosity. It's only because HN is part of YC that it can be HN.

You’re right, I just hope they feel some shame as they do it. I’d hoped that trying to maintain their brand would have kept NYT from this, but it seems like no one is immune.

I'm sure they hate it. No one is immune. Even science journals have started doing it!

I wonder what it will take for the publishing industry to find a solution. Not long ago, articles about the death of the music industry were a staple of online forums. Eventually we got simple ways to pay for most music at a fair rate. I haven't seen one of those articles in a while.

Yeah, hoping there’s some business model that deemphasizes impressions in favor of engagement. My personal favorite idea is Spotify for news with share of subscription fee given out based on time on site or something less purely click based. Main problem I see there is convincing the big guys to give up some control over their customer base, and convincing them that they’ll make more overall, despite potentially making much less per reader than with their other subscribers. Big problems, to be sure.

> If “loophole” were an incorrect choice of words it would not be in the headline.

Wow, that's... generous.

“Correct” here was not supposed to mean you must agree. As others have pointed out “loophole” is often in the eye of the beholder. But I mean to say that it’s not inaccurate to use the word loophole in such a way that a mod should change the title.

Actually learning that the NYTimes calls this a “loophole” is much of the story for me — it is part of a growing anti-tech worker rhetoric. It is part of a similar narrative that tries to justify breaking up tech firms but conveniently ignores telco, pharma, insurance, etc.

Loophole doesn’t have a strict definition. Almost any deduction could be a loophole. Usually it is referring to anything that helps people with high incomes avoid paying taxes.

The definition is very straightforward. It’s a loophole when others do it, especially those I don’t like, but it’s a tax break when I do it.

True, and if poor people could hire lobbyists and tax attorneys, they’d get more loopholes too.

Progressive tax rates, the doubled standard deduction, child tax credit, EITC, and Medicaid expansion are all pretty sweet “loopholes” for those on the lower end of the AGI spectrum.

For me a loophole is something that requires a certain amount of work to benefit from. Much more than ticking in a box in a standard form.

For what it’s worth, QSBS is just a matter of filling in the dollar amount and writing “Section 1202 exclusion”.

To me a loophole is something where you have to perform some sort of otherwise unnecessary accounting procedure in order to qualify. For example, forming an S Corp to funnel contracting income through, solely for the purpose of avoiding the 3.8% payroll surtax.

A classic example of "we didn't intend for people to do that when we wrote the law!" One of the costs of living in a rule-of-law society is that sometimes the law winds up working in unexpected ways.

What do you mean? Section 1202 was very explicitly amended as written to stimulate investment in small business.

It is a huge incentive for Series AA and A investment, particularly for smaller early stage investors where it can effectively double the return.

It’s a fantastic policy to help small business raise money and also retain top talent versus the Goliaths.

There is nothing unintentional about Section 1202. The value of the tax break was strengthened during the Bush stimulus, and then extended and eventually made permanent under Obama. It is a nice bit of tax policy with bipartisan support.

I was referring to your definition of what a loophole is and the example of that (forming an S corp to avoid payroll taxes).

Yeah, it’s why everyone likes being poor.

Being poor sucks. But the absolute best thing about earning little to no income in a year is a) not paying taxes, followed by b) not paying for health insurance. Free visits to Whole Foods might be on the top 10?

If you don't earn any income for a few years, you might even be able to add on some free housing while you're at it. That's one I've never done personally.

Of course, it helps to have some savings to draw from during this time. Because most welfare programs just look at annual income now, and not assets. They used to look at assets, but in many states they no longer do.

The 5th Amendment is a loophole that gives defendants due process.

If you have to invoke it on your taxes, you might have taken a wrong turn somewhere.

It only feels right to call something a loophole, IMHO, if it's clearly out of the scope of the intent of the law.

Not a loophole:

Government passes electric car tax credit to promote electric vehicles -> Entrepreneur starts a successful business selling them due to a relative advantage over conventional vehicles.

Government taxes businesses based on how profitable they are -> Business pays none of the tax because it hasn't made back its initial expenses.

Loophole:

IRS doesn't consider it a kind of compensation when employers provide meals to coal miners, since it's really not feasible to eat at a coal mine any other way, and so exempts employer-provided onsite meals. -> Tech companies in urban areas provide all meals, and employees get all of a day's food, through untaxed onsite meals.

Government allows deduction of business expenses from taxable income. -> Business mysteriously never has taxable income because it blows all profits on "consulting services" from an untaxed non-profit that the owner runs.

It does seem like taking the piss for a multimillion dollar startup to qualify as a "small business". Just because you're staying within the letter of the law doesn't mean it's not a loophole -- arguably that's exactly what a loophole is.

According to the article, professional accountants consider this scheme dubious.

You know startups start you know start small Apples initial seed capital was a few thousands I believe.

The UK has something similar for small companies the EMI share schemes - all of the employees where I work have these options.

> QSBS can save you a lot, but it can be a lot of work to file too. I ran up about $20k in accountant bills doing it on a complex deal.

I don’t understand this. You just claim it on the Schedule D. As far as I know, you don’t file any documentation at the time of the tax return, you simply attest that it qualifies.

Okay, let's call it a tax expenditure instead. What public interest is this expenditure advancing and how efficiently is it advancing that interest as compared to alternative expenditures?

It incentivizes investments in small businesses, which generally have trouble attracting investors because of the high risk of failure. In general we want people to take risks and start new businesses to maintain a healthy and competitive market. That employees who are paid in stock also benefit is a good thing, because in addition to capital investments a startup also requires talented workers to help get off the ground.

Classic New York Times. Explicit tax law = "loophole" if the NYT doesn't like the people who follow that particular explicit tax law.

Special giveaways to me are legitimate tax relief; giveaways to you are shady loopholes.

Yup. This is some serious clickbait. Flagging.

Does anyone have insight into whether QSBS could go away in the foreseeable future? We're not interested in selling our small SaaS business now, but will in the next 2-10 years. It would be a shame to miss out on this.

QSBS was created in 1993 but it wasn't useful until 2010. Those changes were made permanent in 2015. Anything can change but for the near term it probably won't.

With stock options would the 5 year clock start only when the options are exercised, when they were granted, or when they vested?

Both the 50 M$ valuation rule and the 5 year clock start time apply when the stock is exercised.

Note, however, that the "valuation" from a QSBS perspective is usually significantly less than the PR valuation you hear when a startup raises a round (which assumes all shares are valued at the new preferred share price)

The five year clock starts when you early exercise and file an 83b with a vesting schedule, or would the clock start only once the stock has vested?

I think it's the former, when you early exercise, but the language seems a bit confusing.

about a year ago i received 2 opinions from 2 very well regarded CPAs that the 5 year clock starts at exercise, including early exercise.

however, as this is an anonymous forum, filled with scoundrels, tax and legal “advice” should always be ignored with prejudice. you would do well to ask an accountant or tax advisor on your own.

The former, but as the sibling comment says, if you're in this situation a your own CPA is a very worthwhile investment.

For QSBS, you have to own the stock. Granted means you can vest the options over time. Vested means you can exercise the options. Exercised means you own the stock.

How early of an employee would you need to be?

When you join the company needs to be valued less than $50 million (by the article), the price of the actual stock doesn't matter.

Thank you, this is very helpful for me.

So like Eric Schmidt could use this if he cashed out his Google options?

Probably. But it’s limited to the first $10mm of gains.

$10M per year.

(1) In generalIf the taxpayer has eligible gain for the taxable year from 1 or more dispositions of stock issued by any corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account under subsection (a) for the taxable year shall not exceed the greater of—

(A) $10,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation, or

(B) 10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year.

https://www.law.cornell.edu/uscode/text/26/1202

Not per year! Says so even in the text you quoted, "reduced by the aggregate amount ... for prior taxable years ..."

It's $10mm per entity, or 10x what you paid for the stock, whichever is greater.

Yeah, I see your point. But I think the 10X is still yearly. For a founder, that might not be much. For a funder, that might be a considerable benefit.

  (B) 10 times the aggregate adjusted bases ... during the taxable year.

Schmidt joined in 2001 and Google was founded in 1998. I think they were well over $50M in valuation by then.

He was to late - someone Like Mat Cuts could have

That is not correct. The rule applies if the value of the company __at the time of issuance (stock issuance)__ was less than $50m.

For most people at major companies that are going to go public, and got ISOs, this rule wouldn't help you. By the time a company goes public and stock is issued (not talking options here), everyone is hoping to be worth billions.

Does QSBS kick in if the company is valued at < $50M or has raised < $50M at the time of exercise?

Aggregate gross assets.

https://www.law.cornell.edu/uscode/text/26/1202

(A) the aggregate gross assets of such corporation (or any predecessor thereof) at all times on or after the date of the enactment of the Revenue Reconciliation Act of 1993 and before the issuance did not exceed $50,000,000,

(B) the aggregate gross assets of such corporation immediately after the issuance (determined by taking into account amounts received in the issuance) do not exceed $50,000,000, and

Yoda, why is the need for acceptance of self-rationalization so strong in this the thread?

Complete absence of humanities education ensures software engineers can justify damn near anything to themselves as long as they benefit from it.

Very useful trait to have, in a workforce.

And given the preponderance of traditional liberal arts types in the City and Wall Street your basing this assertion on ?

As a former grad student in literature I implore you to avoid a boring two-cultures spat.

So steeples fingers exactly why do you think its wrong to reward risk - there are good economic reasons for taxing capital gains differently to income and its due to the increased risk.

Or do you have a political argument against this? don't forget this is not just the Zuckerberg's of this world its ordinary developers like you and me

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