Private Equity and Qualified Small Business Stock: Tax Implications of Various Holding Company Structures for Control Investments

Abstract

In recent years, interest has grown in structuring private equity acquisitions to take advantage of the tax incentives associated with investments in qualified small business stock (QSBS). Although QSBS can often provide a meaningful tax benefit for private equity investors, deciding whether—and how—to structure a control investment for QSBS can be highly complex. This article considers the benefits of QSBS relative to investments in certain flow-through entities and explores several legal ambiguities and anomalies that lead to both planning opportunities and traps for the unwary in structuring platform investments and add-on acquisitions in a manner that optimizes QSBS.

TOPICS: Private equity, legal/regulatory/public policy, portfolio construction

Key Findings

• • A description of the pre- and posttax IRR implications of an investment in QSBS.

• • A discussion of the impact of management rollover on QSBS.

• • Implications of various structures on the ability to maximize QSBS gain exclusion.