QSBS Planning for Founders
Build the company. Know the tax rules that come with it.
If you founded a U.S. C corporation, your shares may qualify as Qualified Small Business Stock (QSBS). Under Section 1202 of the Internal Revenue Code, eligible gain on QSBS held long enough may be excluded from federal capital gains tax — up to $15 million per company, or 10 times your basis, whichever is greater.
WHAT IS QSBS?
A federal incentive for founders and investors
Congress created Section 1202 to encourage investment in small, growing U.S. businesses. It applies to stock issued by a qualifying C corporation and held by individuals and certain other non-corporate owners. For founders, that often means the shares received at formation or in early financing rounds.
In July 2025, the One Big Beautiful Bill Act expanded the rules for stock issued after July 4, 2025: a higher per-company cap, a higher company size limit, and a partial exclusion that begins after three years instead of five.
THE NUMBERS
$15 million
per-company exclusion cap (or 10x basis, if greater), indexed for inflation after 2026.
$75 million
maximum company gross assets at the time stock is issued
3 / 4 / 5 years
holding periods for 50%, 75%, or 100% exclusion.
DOES MY COMPANY QUALIFY?
The seven core criteria
Whether you're building a company or investing in one, understanding the rules early can help you identify QSBS considerations, protect potential eligibility, and avoid costly surprises.
QSBS status is shaped by choices made early
Eligibility is tested at issuance and over the life of the holding period. Common issues founders discuss with their advisors include:
- Entity choice and timing. The holding period generally starts when C corporation stock is issued. Converting from an LLC later can reset the clock and affects how pre-conversion value is treated.
- Stock redemptions. Certain company repurchases of stock around the time of issuance can disqualify shares.
- Cash and investment assets. Holding too much of the balance sheet in non-operating assets can affect the 80% active business test.
- Documentation. Records of gross assets at each issuance, capitalization tables, and Section 83(b) elections support a future claim.
Section 1045: the rollover option
If QSBS, held for more than six months is sold, Section 1045 allows a non-corporate holder to elect to defer the gain by purchasing other QSBS within 60 days of the sale. The holding period of the original shares carries over to the replacement shares. Specific requirements apply, and the election is made on the taxpayer’s return.
Capital from investors who understand QSBS
Since 1969, U.S. Boston has invested in private companies. Our QSBS strategy invests in U.S. C corporations led by experienced founders, typically at the Series A stage after product-market fit. We executed our first QSBS-eligible exit in 2017 and our first Section 1045 rollover in 2017.
If you are raising capital or evaluating private-company investments, our team welcomes a conversation.
Schedule a Conversation
Schedule a 30-minute conversation — and let's walk through your options.
Frequently Asked Questions
Have More Questions about QSBS and your company?
Start with your tax advisor and attorney. When you are ready to discuss capital, our team is here.