Qualified Small Business Stock (QSBS)
Understanding the QSBS Tax Exclusion
Section 1202 of the Internal Revenue Code generally allows eligible founders, employees, and investors related to certain early-stage companies to potentially pay no federal capital gain tax when they sell stock that is treated as QSBS and held for at least five years. The requirements necessary to achieve this benefit are comprehensive and not always intuitive. QSBS eligibility depends on factors such as the corporation’s formation status, the size of the business upon the corporation’s issuance of relevant stock, the operations and activities of the corporation issuing such stock, and the manner in which a shareholder acquires the relevant stock. To support eligibility, a taxpayer should undertake certain testing, which begins upon a stock issuance and continues throughout a shareholder’s holding period.
The One Big Beautiful Bill Act (OBBBA) further raised the stakes of this federal tax provision by enhancing several parts for stock issued after July 4, 2025. The enhancements included (i) an increased amount of eligible gain exclusion allowed on a per-issuer basis, (ii) an increased asset threshold in determining whether a corporation that issued stock can be considered a qualified small business, and (iii) a tiered system allowing for partial QSBS benefits when the holding period of relevant stock at time of sale is as short as three years.
Our team works with companies and investors to review whether stock can qualify as QSBS and prepare documentation that will support such eligibility upon a shareholder’s exit.
KBF’s Approach to QSBS
KBF provides technical support to ensure a clear QSBS strategy and can prepare documentation for a shareholder to show that they meet the relevant QSBS requirements where appropriate.
KBF helps clients navigate the complexities that surround the different regimes affecting otherwise eligible QSBS issued at different times. This may relate to the different percentages eligible for exclusion, the different thresholds for investing in a qualified small business, and the varied per-issuer exclusion amount. KBF understands how to maximize the QSBS exclusion benefit upon an exit event.
How We Deliver
Transaction Support
KBF has advisors who understand the technical nuance of complex transactions involving QSBS. This could be the sale of QSBS to a larger company where the shareholder will not just receive cash, but also equity in the acquirer. KBF has advisors who lead with cutting edge advice.
Eligibility Review and Documentation
KBF’s advisors have experience evaluating all the necessary aspects of QSBS.
- Eligible Issuer - Must be a domestic C-corporation — not an S-corporation, partnership, or limited liability company (“LLC”) taxed as a pass-through.
- Qualified Small Business Requirement - To meet the qualified small business requirement, the corporation's aggregate gross assets must be $50 million or less at issuance (including proceeds received) under pre-OBBBA rules (stock issued on or before July 4, 2025). For stock issued after July 4, 2025 under the OBBBA, this threshold is raised to $75 million (inflation-adjusted beginning in 2027).
- Active Business - The corporation must operate as an active business for substantially all of a shareholder's holding period.
- Original Issuance - Stock must be acquired directly from the corporation in exchange for cash, property, or services — not on the secondary market.
- Holding Period - Pre-OBBBA (stock issued on or before July 4, 2025 and after September 27, 2010): Stock must be held for more than five years to qualify for the full 100% exclusion. There are no partial exclusion tiers — it is all or nothing. Post-OBBBA (stock issued after July 4, 2025): The OBBBA introduces partial exclusion tiers for the first time: 50% exclusion at three years, 75% exclusion at four years, and the full 100% exclusion at more than five years.
KBF’s advisors will also look for traps which could put at risk QSBS eligibility (e.g., prohibited redemption transactions, ineligible transfers of stock) and opportunities to maximize a shareholder’s QSBS benefits.
KBF will provide the supportive analysis related to all of these matters which will allow a shareholder to rest assured they have done the proper due diligence prior to filing their tax return benefiting from the exclusion.
Frequently Asked Questions
Schedule a Consultation
QSBS planning works best before major milestones — not after. KBF's advisors can review your eligibility, flag potential traps, and prepare the documentation your tax return will depend on.
Explore More Services From KBF Advisory
State & Local Tax (SALT)
Multi-state complexity affects most transactions. KBF's SALT team identifies nexus exposure and multi-state obligations before they become deal issues.
International Tax
For deals with cross-border components, KBF's International Tax team addresses treaty positions, transfer pricing, and global tax structure.
IPO & SEC Readiness
When going public introduces a new level of financial scrutiny, KBF's SEC Readiness team helps you prepare for what comes next.
Transfer Pricing
Intercompany transactions in multinational deal structures require defensible pricing documentation. KBF's Transfer Pricing practice provides economic analysis and planning.
Advisory Services
See the full range of KBF's advisory capabilities, from technical accounting consulting to IPO readiness and business restructuring.
Accounting & Reporting
Complex transactions require specialized accounting treatment. KBF's advisory team supports financial reporting through M&A and other significant business events.