Will High-Yield Treasury Accounts Jeopordize My QSBS Status?
Startups can both diversify and invest their idle cash into Treasuries, Money Market Funds and more, without endangering their QSBS status.
However, you have to carefully plan your working capital needs and abstain from certain investments, in order to align with QSBS regulations.
Below, we outline how we can help invest your startups cash, without putting your QSBS status at stake.
What is QSBS?
Qualified Small Business Stock (“QSBS”) is a tax incentive that allows startup founders to potentially exclude a portion or even all of your capital gains from the sale of qualified stock from federal income tax – resulting in substantial tax savings and increased net proceeds for founders.
Will investing your corporate cash impact QSBS status?
Investing corporate cash can pose certain risks that may impact the QSBS status of startup founders. One of the main risks is the potential disqualification of QSBS status if the investments are not made in accordance with the rules and guidelines set by the IRS.
The IRS has specific criteria that must be met for stock to qualify as QSBS, and any investments that do not meet these criteria could result in the loss of QSBS benefits.
How to invest corporate cash, without losing your QSBS status
First and foremost, in retaining your QSBS status, it is essential to ensure that at least 80% of your company's assets are 'actively engaged in the course of trade or business'.
Herein lies a potential risk: if a notable portion of your corporate funds gets invested into passive holdings, say real estate or equities, the QSBS status of your company could be at stake.
However, to invest corporate cash into short-duration investments like Treasury Bills or Money Market Funds, aligns with industry standards and generally does not endanger your QSBS status, provided that these holdings serve as a component of your needed working capital, or is forecasted to be used within two years.
If it is forecast to not be used and instead held passive for many years, it could endanger your QSBS status.
At Vesto, we work with many startups and small businesses, and always make sure to look out for our customers portfolios to comply with these QSBS requirements.
Working with a platform like Vesto to plan out and build a cash management strategy tailored to your startup, and the restrictions that come with that (eg. QSBS guidelines), could end up saving you lots of headaches down the line.
To summarise, as long as you don't invest your corporate cash into long-term instruments such as public equities or real estate, but instead keep corporate cash in short-term Treasuries or Money Market Funds which you plan to use for working capital needs within the next 2 years, you should be in accordance with the QSBS requirements.
Ultimately, it's essential to consult with a tax professional or advisor who is well-versed in QSBS rules and regulations. They can provide personalized guidance based on your specific situation and help you navigate the complexities of preserving your QSBS status while effectively managing your corporate cash.
At Vesto, our investment team will always do our best to ensure that your treasury portfolio will comply with necessary QSBS restrictions.
If you’re still unsure about your QSBS status, or are looking for a cash management partner to guide your startup through the entire cash management process – from portfolio construction to rebalancing, rollovers, and automating the requisite bookkeeping – schedule a call with our team and we'll be more than happy to help.
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