The process of removing or restructuring passive and non-active assets from an operating corporation so that it satisfies the Qualified Small Business Corporation (QSBC) tests, which require that at least 90% of the corporation's assets (and more than 50% throughout the preceding 24 months) be used in an active business.
Typical techniques include transferring excess cash and investments to a Holding Company, paying dividends or bonuses to reduce retained earnings, selling passive real estate or non-operating assets, and moving corporate-owned life insurance to a Holdco. Because the QSBC tests look back over 24 months, purification should begin well before a planned sale or expected death; late-stage purification draws CRA scrutiny and can fail the holding-period test.