Exercising stock options and QSBS tax treatment after company acquisitions

Thanks for the response. I'm a bit confused though - I thought anything on a 1099-NEC was automatically subject to self-employment tax. If it's not, how do I report it on my tax return to make sure it's not incorrectly subjected to SE tax? Also, does the fact that the company went through two acquisitions affect my QSBS status at all?

The 1099-NEC form is used for various types of non-employee compensation, but not all amounts reported on it are subject to self-employment tax. For stock option exercises by former employees, you would report this on Line 8 of Schedule 1 as "Other Income" (not on Schedule C), which avoids self-employment tax. You might want to include a brief explanation noting "stock option exercise - not subject to SE tax." Regarding QSBS and the acquisitions, it gets complicated. If your original shares qualified as QSBS and the acquisitions were tax-free reorganizations, you might be able to "tack" your holding period and preserve QSBS status under the rollover rules in Section 1045. However, this depends on specific details of each acquisition and whether the acquired companies met QSBS criteria (less than $50M in assets when you received the options, etc.). The rules here are complex and you might benefit from consulting with a tax professional familiar with QSBS rules.

How does taxr.ai handle the reporting part? Like, does it tell you which specific forms to file and where to put the different amounts? I tried using TurboTax for my stock options last year and it absolutely butchered everything and I ended up with a CP2000 notice.

I'm skeptical about these specialized tax tools. Do they actually give proper tax advice or just general information? Because QSBS rules are super nuanced, especially with the whole "original issuance" requirement and active business tests that apply differently depending on when you got the options vs when you exercised them.

It provides specific line-by-line guidance for tax forms, including Schedule D, Form 8949, and Schedule 1. For my situation, it identified that the bargain element needed to go on Schedule 1 as "Other Income" rather than Schedule C to avoid self-employment tax, and it generated the correct basis calculations for Form 8949. It even created a downloadable worksheet I could attach to my return to explain the QSBS exclusion. For QSBS specifically, it analyzes the company's financial information against the Section 1202 requirements and checks things like the original issuance requirement, active business test, and gross asset limitations. It's much more detailed than general information - it applies the rules to your specific situation and documents. It actually saved me from missing out on a partial QSBS exclusion I wouldn't have known I qualified for.

How exactly does this service work? Do they just call the IRS for you or what? I'm confused about how they're able to get through when regular people can't.

Sure, I'll just hand over my personal tax details to some random company to call the IRS for me. How is this even legal? Sounds like a scam to get people's sensitive financial information.

They don't call the IRS for you - they use an automated system that navigates the IRS phone tree and waits on hold, then when they reach an agent, they connect the call directly to your phone. You're the one who speaks with the IRS agent, not them. They basically just handle the frustrating waiting part. They don't need access to any of your personal tax information to do this. You just provide your phone number so they can connect the call to you once they reach an agent. The service just saves you from spending hours listening to hold music. They don't participate in the actual conversation with the IRS at all.

I exercised the options about 45 days ago but haven't sold the resulting shares yet. I'm trying to figure out if I should hold them long-term for QSBS treatment or if that ship has already sailed because of the acquisitions. The original company definitely qualified as a small business when I joined (under $5M in assets), but it's gone through two acquisitions since then.

Great news that you haven't sold yet! The QSBS clock starts ticking from when you exercise the options (not when you received them), so you're still at the beginning of your potential 5-year holding period. The acquisitions complicate things but don't necessarily disqualify you. If the acquisitions were structured as tax-free reorganizations (most are), and you received the new company's stock in exchange for your old company stock, you may be able to maintain QSBS status under the "substantially all assets" rules of Section 1202. What's critical is what percentage of QSBS-qualifying assets were maintained after each acquisition. If the original business operations continued as a substantially similar business after the acquisitions, you might still qualify. I'd suggest getting professional advice on this specific aspect since it's very fact-dependent and could potentially save you a lot in taxes if you qualify for the QSBS exclusion after your 5-year holding period.

AMT typically applies to Incentive Stock Options (ISOs), not to Non-qualified Stock Options (NSOs). Based on the original post mentioning a 1099-NEC, it sounds like these were NSOs. With NSOs, you pay ordinary income tax on the spread at exercise (reported on the 1099-NEC), but there's no AMT impact. If they were ISOs, you'd typically get a Form 3921 instead, and the spread would be an AMT adjustment item rather than ordinary income.