Business Owner Advisor Match

QSBS: The $15M Federal Tax Exemption Most Business Owners Miss

Section 1202 of the Internal Revenue Code allows founders and investors who hold qualified small business stock (QSBS) to exclude up to $15 million of gain from federal income tax when they sell. After July 4, 2025, the One Big Beautiful Bill Act (OBBBA) expanded the rules significantly. If you own C-corp stock and haven't had a specialist review your QSBS position, you may be leaving millions on the table.

What QSBS is — and the size of the exemption

When you sell stock in a C-corporation that meets Section 1202's requirements, the IRS lets you exclude a portion of your gain from federal income tax. The excluded amount doesn't appear on your return and isn't subject to capital gains rates. For stock issued after July 4, 2025, that exclusion caps at the greater of:

For stock issued before July 4, 2025 (pre-OBBBA), the cap is the greater of $10 million or 10× basis.

To put this in dollar terms: if you own a C-corp software company, paid $500K for your original shares, and sell for $8M — you could owe zero federal tax on the entire $7.5M gain. Scale that to a $15M gain on shares bought for $200K, and you're excluding 75× your investment from federal tax.

Example — $20M C-corp exit (post-OBBBA rules, stock issued Oct 2025):
  • Sale proceeds: $20,000,000
  • Original cost basis: $800,000
  • Total gain: $19,200,000
  • QSBS exclusion cap: greater of $15M or (10 × $800K = $8M) → $15 million
  • Federally excluded: $15,000,000 (zero federal tax)
  • Remaining taxable gain: $4,200,000 (taxed at long-term capital gains rates)
  • Tax saved vs. no QSBS: roughly $3.3–$3.6M in federal tax alone
Without QSBS, that $15M of excluded gain would generate roughly $3.3–$3.6M in federal tax (at 20% + 3.8% NIIT). State tax savings depend on your state — California does not recognize QSBS exclusions; many other states follow the federal treatment.

Post-OBBBA rules — stock issued after July 4, 2025

The OBBBA made three major changes to Section 1202 for stock issued after July 4, 2025:1

  1. Higher exclusion cap: $15M. Raised from $10M. Inflation-adjusted from 2027. Applies per issuer — you can stack QSBS across multiple qualifying companies.
  2. Higher gross assets ceiling: $75M. The issuing company can have up to $75M in gross assets at the time of stock issuance (up from $50M). This makes QSBS available at larger funding stages than before.
  3. Tiered holding period. The old rule required exactly 5 years for full exclusion. The OBBBA introduced a graduated schedule:
Holding period % of gain excluded Rate on unexcluded gain
3 years50%28% (not standard LTCG rates)2
4 years75%28%
5+ years100%N/A — no taxable gain

Note on the 28% rate: For 3- and 4-year holds, the unexcluded portion is taxed at 28%, not the standard 15%/20% long-term capital gains rate. This makes partial exclusion less efficient than it appears — factor this into your exit timing.

Pre-OBBBA rules — stock issued on or before July 4, 2025

If your stock was issued before the OBBBA enactment date, the prior rules apply permanently to those shares:3

If you're within your 5-year window on pre-OBBBA shares, be patient — selling before 5 years means forfeiting the full exclusion and triggering ordinary capital gains on everything.

QSBS eligibility checklist — 5 requirements

All five must be met, or the gain doesn't qualify. These are bright-line rules; meeting four out of five gets you nothing.

  1. The issuing entity must be a domestic C-corporation. S-corps, LLCs, and partnerships do not issue QSBS. Period. If your business is currently an S-corp or LLC, shares issued in that structure are ineligible — only shares issued after a valid C-corp formation (or conversion) qualify, and only from the date of conversion forward.
  2. The company's gross assets must have been ≤$75M at time of issuance (≤$50M for pre-OBBBA stock). "Gross assets" means cash plus the adjusted basis of all other property held by the corporation at the moment the stock was issued. Once your shares are issued and the test is passed, subsequent asset growth doesn't disqualify those shares.
  3. You must have acquired the stock at original issuance from the corporation. Shares bought on a secondary market, from another shareholder, or through a stock exchange do not qualify. You must have received shares directly from the company in exchange for money, property, or services.
  4. The corporation must be engaged in a qualified trade or business. Section 1202 explicitly excludes certain industries from eligibility (see below). If the business derives revenue primarily from excluded services, the stock doesn't qualify.
  5. You must be an individual taxpayer, trust, estate, or pass-through entity. C-corporations cannot claim the Section 1202 exclusion. The benefit flows to individual founders, employees receiving equity, and investors.

Industries that qualify — and those that don't

This is where many business owners are surprised. The qualified small business stock rules exclude specific "specified service trades or businesses." If your company earns revenue primarily from these fields, QSBS won't apply:4

Industries that DO qualify include: technology and software (the most common use case), manufacturing, wholesale and retail trade, construction, transportation, certain real estate activities, and any other industry not on the excluded list.

A business in a borderline category — say, a technology company that also provides implementation consulting — needs a precise analysis of which revenue stream dominates. A specialist advisor working with your CPA can make this call defensibly before you structure equity.

Why entity structure at formation is the critical decision

QSBS is a planning tool, not a tax return strategy. You can't retroactively qualify shares after the fact. The decisions that determine QSBS eligibility happen at formation or at the moment of entity conversion — often years before any exit discussion begins.

Two scenarios where business owners permanently forfeit QSBS:

  1. Formed as an S-corp. S-corp shares are ineligible. Many early-stage business owners choose S-corp for FICA savings — which is right in many cases — but permanently closes the QSBS door for those shares. If you later convert to a C-corp, only shares issued after conversion qualify.
  2. Company outgrew the asset ceiling before the advisor conversation happened. A fast-growing company that crossed $75M in gross assets before any QSBS planning was done can't issue qualifying shares going forward. The window closed without the owner knowing it existed.
The QSBS planning window for a growing business owner:
  • Stage 1 (Revenue <$500K): Entity choice matters. C-corp with QSBS potential vs. S-corp with FICA savings — these are competing strategies. Requires analysis of your specific exit horizon and expected sale price.
  • Stage 2 (Revenue $500K–$5M): If you're still pre-$75M in gross assets, you may still issue qualifying shares to yourself, co-founders, or key employees. Each issuance starts its own clock.
  • Stage 3 (Revenue $5M+, approaching asset ceiling): Urgency increases. New equity grants after crossing $75M gross assets won't qualify. Existing qualifying shares should be tracked carefully.
  • Stage 4 (Exit within 3–5 years): Holding period management is the primary lever. If shares are at 3.5 years, the 4-year threshold at 75% exclusion may be worth waiting for. A specialist calculates the breakeven on 6 additional months of delay.

Stacking QSBS across multiple companies

The $15M exclusion cap applies per issuer, not per taxpayer. A founder who has had equity stakes in three separate qualifying companies can exclude up to $15M of gain from each company in the same tax year. This is one of the most powerful — and least-known — aspects of Section 1202.

Co-founders, investors, and early employees each have their own $15M cap for the same issuer. A husband and wife who each own qualifying shares in the same company can each exclude up to $15M — $30M combined. (Note: the per-issuer cap for married filing separately is $7.5M each.)

Common QSBS planning mistakes

Sources

  1. McLane Middleton — OBBBA Changes to the QSBS Regime (2025). $15M cap, $75M gross assets test, tiered 3/4/5-year holding period rules for post-July 4, 2025 stock.
  2. The Tax Adviser — QSBS Gets a Makeover (Nov 2025). Tiered holding period details; 28% rate on unexcluded gain for 3- and 4-year holds.
  3. IRC § 1202 — Partial Exclusion for Gain from Certain Small Business Stock (LII/Cornell). Full statutory text; pre-OBBBA rules remain applicable to stock issued on or before July 4, 2025.
  4. Surgent CPE — Section 1202 QSBS in 2026: New Rules, Higher Stakes, Strict Requirements. Excluded industry list, 80% active business test.
  5. RSM — OBBBA Expands QSBS Exclusions (2025). Planning scenarios; per-issuer cap stacking; married taxpayer $7.5M MFS cap.
  6. Holland & Knight — Section 1202 Gross Assets and Basis Issues (July 2025). How gross assets are calculated; time-of-issuance evaluation.

QSBS rules verified against IRC § 1202 and OBBBA (enacted July 4, 2025) as of April 2026. State tax treatment varies — consult a fee-only advisor and CPA before structuring equity or timing an exit around Section 1202.

Related tools and guides

Talk to an advisor who knows Section 1202

QSBS planning requires coordination across your financial advisor, CPA, and attorney — ideally starting years before an exit. Fee-only advisors in our network work with business owners on entity structure, equity planning, and exit strategy. No commissions, no obligation.