QSBS Tax Exclusion Services for Founders & Investors for 2026

December 15, 2025

By the CFO Team at Weekly Accounting | Last Updated: December 2025

If you’re building a startup or investing in one, the Qualified Small Business Stock (QSBS) exclusion could be the single most valuable tax benefit you’ve never heard of. Under IRC Section 1202, eligible shareholders can exclude up to 100% of their capital gains from federal taxes, potentially saving millions when you exit. At Weekly Accounting, we help founders and investors capture every dollar of that benefit.

What Is Qualified Small Business Stock?

Qualified Small Business Stock is stock issued by a qualifying C-corporation that meets specific IRS requirements under Section 1202 of the Internal Revenue Code. When shareholders sell QSBS they’ve held for at least five years, they can exclude some or all of their capital gains from federal income tax.

Congress created this incentive in 1993 to encourage investment in early-stage businesses. The logic was straightforward: startups are risky, and favorable tax treatment helps offset that risk. Over the years, the benefit has expanded significantly, from a 50% exclusion in the 1990s to the 100% exclusion available today.

The result? A founder who invests $100,000 in their own company and later sells for $10 million could owe zero federal tax on that $9.9 million gain. That’s not a typo. It’s one of the most powerful wealth-building provisions in the tax code.

The Section 1202 Tax Benefit Explained

The amount you can exclude depends on when your stock was issued:

Stock Issuance Date	Exclusion Percentage	Maximum Exclusion
August 1993 – February 2009	50%	$10M or 10× basis
February 2009 – September 2010	75%	$10M or 10× basis
September 2010 – July 4, 2025	100%	$10M or 10× basis
After July 4, 2025	50–100%*	$15M or 10× basis

\Tiered under the One Big Beautiful Bill Act: 50% exclusion at 3 years, 75% at 4 years, 100% at 5 years.*

Here’s what this looks like in practice: You invest $500,000 in a qualifying startup. Five years later, you sell your shares for $5.5 million. Your gain is $5 million. With the QSBS exclusion, you exclude the entire gain from federal income tax. At today’s top capital gains rate of 23.8%, that’s $1.19 million in tax savings, money that stays in your pocket instead of going to the IRS.

The “10× basis” rule is worth noting. Your exclusion cap is the greater of $10 million (or $15 million for post-July 2025 stock) or ten times your original investment. If you put in $2 million, your cap is $20 million, not $10 million. This makes QSBS particularly valuable for founders with significant equity stakes.

Who Qualifies for QSBS Benefits?

Both the company and the shareholder must meet specific criteria. Miss one requirement, and the entire benefit disappears. This is where we see founders lose millions, not because they didn’t qualify, but because they didn’t verify qualification until it was too late.

Company Requirements (Qualified Small Business)

For stock to qualify as QSBS, the issuing company must satisfy these requirements at the time of issuance and throughout the holding period:

1. Domestic C-Corporation Status: The company must be organized as a U.S. C-corporation. Stock in S-corporations, LLCs, partnerships, and foreign corporations does not qualify. This is non-negotiable, there’s no workaround.

2. Gross Asset Limitation: The corporation’s aggregate gross assets cannot exceed $75 million at any time before or immediately after the stock issuance. For stock issued before July 5, 2025, the threshold is $50 million. Once a company crosses this line, it can never again issue QSBS, even if assets later decline.

3. Active Business Requirement: At least 80% of the company’s assets must be used in the active conduct of a qualified trade or business. Parking excess cash in passive investments can jeopardize this test.

4. Qualified Trade or Business: The company cannot operate in certain excluded industries. According to IRS Publication 550, excluded fields include:

Health, law, engineering, architecture, and accounting services
Financial services, banking, insurance, and brokerage
Consulting, actuarial science, and performing arts
Hotels, motels, and restaurants
Farming and natural resource extraction

Technology companies, manufacturers, retailers, and most SaaS businesses typically qualify. Professional services firms generally do not.

Shareholder Requirements

Shareholders must also meet specific criteria to claim the exclusion:

Original Issuance: You must acquire the stock directly from the company in exchange for cash, property, or services. Shares purchased on the secondary market, from another investor or through a broker, do not qualify.

Holding Period: You must hold the stock for more than five years to claim the full exclusion. For stock issued after July 4, 2025, partial benefits are available at three and four years under the new tiered structure.

Non-Corporate Taxpayer: Only individuals, trusts, and estates can claim the QSBS exclusion. C-corporations cannot. However, partnerships and S-corporations can hold QSBS and pass the benefit through to their individual partners or shareholders.

QSBS Qualification Checklist

Requirement	What It Means
C-Corp Status	Must be a U.S. C-corporation (not S-corp, LLC, or partnership)
Gross Asset Limit	≤$75M at stock issuance (≤$50M for pre-July 2025 stock)
Active Business Test	80%+ of assets used in qualified trade/business operations
Qualified Industry	Not in health, law, finance, hospitality, or other excluded fields
5-Year Holding Period	Stock must be held 5+ years for 100% exclusion
Original Issuance	Acquired directly from the company (not secondary market)

How Much Can You Save with QSBS?

The numbers speak for themselves. At the current federal long-term capital gains rate of 23.8% (including the 3.8% Net Investment Income Tax), excluding $10 million in gains saves you $2,380,000 in federal taxes.

For a founder with a $2 million basis who sells for $22 million, the 10× rule allows a $20 million exclusion, translating to $4,760,000 in federal tax savings.

Important caveat: State taxes vary. Most states conform to the federal QSBS exclusion, but several do not. According to the Small Business Administration, states that do not recognize the QSBS exclusion include:

California
Pennsylvania
New Jersey
Alabama
Mississippi

If you’re in California, you’ll still owe state capital gains tax on your QSBS sale, potentially 13.3% on top of whatever federal tax applies. This makes state-level planning essential for founders in non-conforming states.

Common QSBS Mistakes That Cost Founders Millions

We’ve seen founders lose the QSBS benefit for preventable reasons. These are the mistakes that keep us up at night, because by the time most people discover them, it’s too late to fix.

Starting as an LLC or S-Corp

Many founders choose pass-through entities for their simplicity and tax treatment. The problem? Those entities cannot issue QSBS. Converting to a C-corporation later is possible, but it introduces complications.

When you convert, the IRS values your assets at fair market value for purposes of the gross asset test. If your company is worth more than $75 million at conversion, no stock issued in the conversion qualifies as QSBS. The cleaner path is electing C-corp status from day one if QSBS benefits are part of your long-term plan.

Exceeding the Gross Asset Threshold

Every funding round adds to your gross assets. A successful Series B could push you over the $75 million line, and once you cross it, the company can never again issue qualifying stock. Existing QSBS remains valid, but new grants to employees, new investor shares, and founder top-ups lose the benefit permanently.

This is why proactive monitoring matters. By the time most founders check their QSBS status, they’ve already exceeded the threshold without realizing it. We help clients track this in real time so there are no surprises.

Disqualifying Stock Redemptions

Company buybacks can disqualify QSBS, even stock that otherwise meets every requirement. The rules are technical: redemptions exceeding certain thresholds within two years before or after a stock issuance can taint the shares issued during that window.

Redemptions from the taxpayer or related persons have an even longer look-back period of four years. This catches many companies off guard during tender offers, employee departures, or investor liquidity events.

Excess Working Capital

Holding too much cash in passive investments can violate the 80% active business requirement. The IRS doesn’t want companies using QSBS status as a vehicle for investment income. If your startup raises a large round and parks the funds in money market accounts or corporate bonds with maturities over 24 months, you may be putting your QSBS status at risk.

Why Work with Weekly Accounting for QSBS?

Most CPAs understand the basics of QSBS. Few track it proactively. The difference matters because QSBS compliance isn’t a one-time check, it’s an ongoing discipline that starts at incorporation and continues through exit.

At Weekly Accounting, we specialize in startup tax strategy. We’ve helped founders preserve millions in QSBS benefits by catching issues early: entity structure problems, asset threshold risks, and redemption traps that generalist accountants miss.

Our QSBS Services

QSBS Eligibility Analysis, We evaluate your company and shareholder situations against all Section 1202 requirements
Compliance Tracking, Ongoing monitoring of gross assets, active business tests, and redemption activity
Attestation Letter Preparation, Documentation that substantiates your QSBS claims in case of IRS inquiry
Entity Structuring, Guidance on C-corp election timing and LLC-to-C-corp conversions
Exit Planning, Strategies to maximize exclusions at sale, including QSBS stacking for family members
Section 1045 Rollover Guidance, Tax-deferred reinvestment options if you sell before five years
State Conformity Analysis, State-by-state breakdown of your QSBS tax treatment

Section 1045: Rollover Your QSBS Gains Tax-Free

What if you need to sell before the five-year holding period? Section 1045 provides an escape hatch.

If you sell QSBS that you’ve held for at least six months, you can reinvest the proceeds into replacement QSBS within 60 days and defer the gain entirely. The holding period of your original stock carries over to the replacement stock, so you’re still on track for the Section 1202 exclusion, just with a different company’s shares.

This is particularly useful when your company gets acquired before the five-year mark or when you want to diversify into other qualifying startups without triggering a tax event. The rules are precise, and the 60-day window is strict, but the benefit is substantial.

Frequently Asked Questions About QSBS

Does my state recognize the QSBS exclusion?

Most states conform to the federal exclusion, but California, Pennsylvania, New Jersey, Alabama, and Mississippi do not. If you’re a resident of a non-conforming state, you’ll owe state capital gains tax even if you pay nothing federally. We provide state-specific analysis for all clients.

Can I claim QSBS benefits if I received stock options?

Yes, once you exercise them. For non-qualified stock options (NQSOs), your QSBS holding period begins at exercise. For incentive stock options (ISOs), the holding period also typically begins at exercise. Early exercise strategies can accelerate your path to the five-year mark.

What happens if my company converts from an LLC to a C-Corp?

Conversion is possible, but the company’s fair market value at conversion determines whether the gross asset test is met. If FMV exceeds $75 million, no QSBS results from the conversion. Proper structuring and contemporaneous valuation are critical.

Is there a limit to how much QSBS I can exclude?

Yes. Per issuer, you can exclude the greater of $10 million (or $15 million for post-July 2025 stock) or 10 times your adjusted basis. Advanced strategies like “QSBS stacking”, gifting shares to family members who each have their own exclusion, can multiply these limits significantly.

Can trusts and estates claim the QSBS exclusion?

Absolutely. Non-corporate taxpayers including individuals, trusts, and estates all qualify. Transferring QSBS by gift to family members or trusts can preserve the benefit and create additional exclusion capacity, a powerful estate planning tool.

How do I prove my stock qualifies as QSBS?

You need documentation: original stock purchase agreements, proof of holding period, company financial records showing gross assets, and ideally an attestation letter. The IRS can challenge QSBS claims, and the burden of proof falls on you. We help clients build bulletproof support packages before they’re ever needed.

Get Your Free QSBS Eligibility Review

The QSBS exclusion can save you millions, but only if you qualify. The requirements are specific, the pitfalls are real, and the cost of getting it wrong is steep.

At Weekly Accounting, we help founders and investors navigate Section 1202 from formation through exit. Whether you’re launching a new startup, considering a C-corp conversion, or approaching a liquidity event, we’ll help you capture every dollar of benefit you’re entitled to.

Schedule Your Free QSBS Strategy Call →

This content is for informational purposes only and does not constitute tax or legal advice. QSBS qualification depends on specific facts and circumstances. Consult with a qualified tax professional before making decisions based on this information.

Sources & Further Reading

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