Comment by tjpd
5 hours ago
Agree on getting tax advice. But because QSBS is such a gift to VCs I really don’t want to jeopardize it particularly when a bunch of startups are raising $20m on $0 revenue, so the balance sheet is basically just cash. At ~5% that’s $1M/yr of interest, which can easily be the only income the company has. If that cash is sitting in an investment portfolio instead of boring cash equivalents, it feels like you could start getting into weird territory with the 80% active business asset test. The probability is Low but the impact for us is massive.
Agreed, QSBS is too valuable to be cavalier about.
The active business asset test is about "intent and substance" and not balance sheet line items. I think it's very clear in this case that you'd be using it as a cash equivalent, since floating-rate agency MBS have a comparable risk profile to money market holdings (short duration, government-backed, highly liquid). And economically they're serving the same function: parking working capital safely until your business needs it. And frankly, I think accessing those assets through a treasury management platform, rather than a brokerage account, helps establish intent and substance.
That's my view on it at least, and I know many companies use these assets for long-term cash without issue. But I'm not a tax expert.
I do really appreciate you bringing this up though, and I'll reach out to our tax lawyer to get a proper written opinion we can share with our customers. Of course it's not a replacement for getting your own tax advice, but I think it'll be helpful regardless.