IRS Limits QSB Stock Tax Exclusion

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Filing the document Form 8275 with your tax return is somewhat akin to waving a red flag in front of the IRS and requesting to be audited.

Filing the document Form 8275 with your tax return is somewhat akin to waving a red flag in front of the IRS and requesting to be audited.

The IRS published tax guidelines restricting the scope of section 1202. Section 1202 allows taxpayers to exclude capital gains from the sale of QSBS provided specific requirements are satisfied.

This is one of the IRS’s strictest gain exclusion rules. Will it impact the growth of small businesses?

The latest recommendation was CCA 202204007 (November 4, 2021), which went public on January 28, 2022. This guidance comes from the IRS Office of Chief Counsel in Washington, D.C. To avoid fines, taxpayers must have “substantial authority” for the tax treatment of an item.

Significant authority correlates to a 40% success rate. Filing that document with a tax return is like waving a red flag in front of the IRS and requesting to be audited.


CCA taxpayers sold appreciated stock and claimed capital gain exclusion under section 1202.

The CCA examines whether the firm is involved in a qualifying trade or business (QTB). Except for those designated in section 1202(e), every company is a QTB (3). The applicable exclusion is for “brokerage services.”

The IRS decided that the taxpayer was not a typical broker since it did more than an intermediary. The judgment narrowed the brokerage services exception, allowing more taxpayers to qualify for the QSBS deduction.

Officials summarized this judgment before.

Potential lessees utilize the site to make nonbinding reservations for particular amenities. Likewise, once a lessor and lessee have agreed, they sign a lease agreement and make all lease payments online. The website also hosts web pages for lessors to use to lease their facilities.

Brokerage Services

The IRS found the company’s business of administering the website includes “brokerage services” based on these facts, which may surprise the taxpayer. After all, the firm acts as a mediator between lessors and lessees, which is exactly what a broker does.

The IRS concluded that neither section 1202 nor case law defines “brokerage services.”

It next examined the definition of “broker” in the dictionary and other sections of the Internal Revenue Code that provide similar exemptions for brokerage services. The IRS defines a broker as one who works as a middleman and one who is hired by another to negotiate contracts or act as a mediator, particularly between potential buyers and sellers.

The IRS noted that there are different types of brokers. Just because you don’t usually get the reference as a broker does not exclude the likelihood you are one.

The IRS looked up similar tax rules. One section on information reporting described a broker as “anyone who routinely acts as a middleman about property or services” for a fee.

Although the requirements in that part restrict information reporting to brokers who only deal in specific kinds of financial assets, the IRS concluded that the definition of a broker remained wide enough to extend to the company’s internet activities.

The law also contains a broker ordering regulation that applies to different brokers. As used in this regulation, a real estate broker is in charge of concluding the deal, as well as the seller’s and buyer’s brokers.

IRS Rules Tax Provision

For example, a taxpayer provides brokerage services to perform customer transactions and is compensated based on actual trades.

The business operates as a mediator, connecting buyers and sellers, and does more than merely passively display ads on its website. It also does not present consumers with content or targeted advertising based on their search history.

In exchange for facilitating lease agreements between prospective lessors and lessees of real estate, the firm charges a fee.

The CCA is the IRS’s sixth QTB declaration and the first to declare the company is not a QTB. The circumstances of the CCA do not favor the taxpayer. As a result, it is difficult to claim that the new guideline constitutes a paradigm change at the IRS.

The implication appears to be that the IRS is scrutinizing QSBS exclusion claims and will not hesitate to challenge taxpayers’ claims. Taxpayers requesting a QSBS exclusion should record their share and engage with their consultants to ensure sound arguments.

Tax Yourself…to Protect Yourself

In conclusion, tax yourself first. Before the Treasury Department has to do it for you.

However, this means good bookkeeping and excellent data retrieval ability. Use a cloud platform you can trust. If you can’t do it yourself, hire or outsource it.

The rules change constantly. If you can’t keep up, get an expert. Fines and interest on taxes mount up fast. Don’t get caught in that trap.

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