Qualified small business stock
Gain that never becomes taxable.
Internal Revenue Code Section 1202 can exclude the gain on a sale of qualifying stock from federal tax. Whether it applies is decided by facts set years before the sale, most of them at the moment the business was formed.
Who this is for
Founders, early shareholders, and their advisors
Founders
Where the entity choice made decides whether this planning is available.
Shareholders preparing for a sale
Where the question is whether the stock qualifies, and what the holding period allows.
Companies issuing new stock
Rounds, option exercises, and grants, each of which starts its own clock.
Companies that converted
A business that became a C corporation, where the conversion can determine eligibility.
Advisors
Working alongside advisors to determine eligibility.
What decides it
Four tests applied to the business
It has to be a domestic C corporation
Internal Revenue Code Section 1202 applies to stock in a domestic C corporation and to nothing else. An LLC or an S corporation does not issue qualifying stock, which is why entity choice at formation is the first and most consequential decision here.
The stock has to be acquired at original issue
Qualifying stock is acquired from the corporation itself in exchange for money, property, or services, not bought from another shareholder. Stock purchased on a secondary basis does not qualify, however early the purchase.
The trade or business has to be an eligible one
Certain businesses are excluded, such as those in the fields of law, accounting, engineering, and health.
The gross asset ceiling is tested
The corporation's aggregate gross assets must sit under the aggregate gross asset limit at all times up to and immediately after the stock is issued.
The current figures
Two numbers that changed
Legislation enacted in July of 2025 amended Internal Revenue Code Section 1202 for newly acquired stock. Stock acquired on or before July 4, 2025, remains under the prior rules, so a corporation can hold two classes of shareholders with different answers.
3 / 4 / 5
The holding period, now tiered
For stock acquired after July 4, 2025, a partial exclusion becomes available at 3 years and again at 4 years, with the full exclusion at 5 years. Stock acquired on or before July 4, 2025, reaches its exclusion only at 5 years.
$15M
Per issuer, and a higher gross asset ceiling
The per-issuer limit moved from $10 million to $15 million for newly acquired stock, and the corporation's aggregate gross asset ceiling moved from $50 million to $75 million.
These figures apply to stock acquired after July 4, 2025, and are stated for general informational purposes, and not as a projection of any result. Whether Internal Revenue Code Section 1202 applies is determined company by company and shareholder by shareholder, and the analysis depends on records held by the corporation.
Control
What a founder still decides
Most of what determines the answer is set early, which is the difficulty and also the opportunity. These remain within reach while the business is being built.
- The entity, at formation, the one decision that cannot be fixed later without cost
- When stock is issued, because each issuance starts its own holding period
- How the business is described, in the documents that a later examiner will read
- Whether assets stay under the ceiling, which is a question of timing around a capital raise
- How a conversion is documented, where an eligible entity becomes a C corporation
- Who holds the shares, whether it is an individual, holding company, or a trust
What it does not do
Four limits worth hearing early
Each one of these tends to come up eventually.
It is federal only
Internal Revenue Code Section 1202 is a federal provision. States do not all follow it, and a state that decouples can tax gain the federal return excludes. Where you live at the time of sale matters.
The services exclusion is broader than it looks
Businesses are frequently surprised to find themselves inside the excluded fields. The test looks at what the company actually does and what its principal asset is, not at how it describes itself.
Records decide it, years later
The aggregate gross asset test and the original-issue requirement are proved from the corporation's own records. Where those records are thin, the position may be weak regardless of the underlying facts.
A redemption can disqualify
Certain purchases of its own stock by the corporation, within defined windows around an issuance, can taint the stock. This catches companies that buy back shares from a departing founder without advice.
Next step
The entity choice is the cheapest decision here.
Bring the business as it stands, its formation history, any conversion, and documents detailing a capital raise or a sale. We can work alongside your advisors to help plan for the sale of eligible qualified small business stock.
Initial consultations are provided without charge.