QSBS Planning SEO Updates
Understand the tax rules behind Qualified Small Business Stock.
If you are building a company or investing in one, Qualified Small Business Stock (QSBS) may offer significant federal tax benefits. Under Section 1202 of the Internal Revenue Code, eligible gain may be excluded from federal capital gains tax, subject to specific requirements and limitations.
WHAT IS QSBS?
A federal incentive for founders and investors
Section 1202 was created to encourage investment in small, growing U.S. businesses. It applies to stock issued by qualifying C corporations and held by individuals and certain other non-corporate owners.
For founders, QSBS may apply to shares received at formation or in early financing rounds. For investors, it generally applies to qualifying shares acquired directly from the company.
In July 2025, the rules changed for stock issued after July 4, 2025, including a higher exclusion cap, higher company size limit, and partial exclusions beginning after three years.
THE NUMBERS
$15 million
per-company exclusion cap, or 10x basis if greater.
$75 million
maximum company gross assets at the time stock is issued.
3 / 4 / 5 years
holding periods for 50%, 75%, or 100% exclusion.
Plan for QSBS Eligibility
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 FOR FOUNDERS & ENTREPRENEURS
Founders should consider QSBS eligibility early because certain requirements are tested when stock is issued and others continue throughout the holding period.
Key considerations include:
- Entity choice. QSBS generally requires a domestic C corporation.
- Original issuance. Shares must generally be acquired directly from the company for cash, property, or services.
- Company assets. The gross asset and active-business requirements must be satisfied.
- Stock redemptions. Certain company repurchases can affect eligibility.
- Documentation. Capitalization records, gross asset information, and Section 83(b) elections can help support a future claim.
QSBS FOR HIGH-NET-WORTH INVESTORS
For investors, QSBS eligibility depends on the company, how the stock is acquired, the investment structure, and the holding period.
Key considerations include:
- Original issuance. Shares purchased from another shareholder generally do not qualify.
- Holding period. For stock issued after July 4, 2025, partial exclusions may begin after three years, with the full exclusion generally available after five.
- Investment structure. QSBS held through certain partnerships or funds may pass through to qualifying partners, subject to specific requirements.
- Per-company limits. The exclusion generally applies separately to each issuing company.
- Advisor review. Investors should have their tax and legal advisors evaluate QSBS eligibility before investing.
DOES THE STOCK QUALIFY?
The core criteria
- U.S. C corporation. The company must be a domestic C corporation when the stock is issued and for substantially all of the holding period.
- Original issuance. Stock must generally be acquired directly from the company.
- Gross asset test. For stock issued after July 4, 2025, gross assets generally cannot exceed $75 million at the applicable issuance thresholds.
- Active business. At least 80% of the company's assets, by value, must generally be used in a qualified active business.
- Qualified industry. Certain industries are excluded, including specified professional services, financial businesses, investing, farming, hospitality, and others identified in Section 1202.
- Eligible holder. The benefit is generally available to individuals, trusts, estates, and certain pass-through entities, but not C corporations.
- Holding period. The applicable holding period depends on when the stock was issued.
WORKING WITH U.S. BOSTON
Capital for companies. Experience with 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.
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