Suppose you started a company with relatively little capital, built it over several years, benefit from a stellar reputation both on- and off-line, and now have a buyer interested in buying the business.

Now, if the value of your shares in the business has grown substantially, a sale could produce a sizable taxable gain. But your federal tax bill could look very different if those shares qualify as qualified small business stock (QSBS).

Section 1202 of the Internal Revenue Code allows eligible shareholders to exclude some or all of the gain from the sale of qualifying stock from federal taxable income, subject to specific requirements and limitations. And recent changes expanded those benefits for stock acquired after July 4, 2025, including potential exclusions after shorter holding periods.

For someone forming or investing in a growing company, those rules can influence decisions being made long before anyone talks about selling or acquiring the business. The choice of business entity, the timing of a stock issuance, changes in ownership, and even the company’s growth, can affect whether a future sale qualifies for favorable QSBS treatment.

In this SWC blog post, we cover what you need to know to take advantage of the benefits offered by the Internal Revenue Code (IRC), starting with how an ownership stake qualifies as qualified small business stock.

How Does Stock Qualify as QSBS?

Qualified small business stock (QSBS) treatment starts with the company that issues the shares. Generally, the company must operate as a domestic C corporation, and the shareholder must acquire the stock at original issuance in exchange for money, certain property, or services. The person claiming the exclusion must also qualify as a noncorporate taxpayer.

Timing Matters: The size of the company at the time it issues the stock plays an important role. For stock issued on or before July 4, 2025, the corporation generally must have aggregate gross assets of $50 million or less before and immediately after the stock issuance. For stock issued after July 4, 2025, the limit rises to $75 million.

The higher threshold could matter to a growing company considering whether and when to issue shares. A business that falls below the limit today could grow beyond it later, potentially changing the QSBS analysis for future stock issuances.

The corporation’s activities also have to qualify. During substantially all of the shareholder’s holding period, at least 80 percent of the corporation’s assets, measured by value, generally must support the active conduct of one or more qualified trades or businesses.

Section 1202 of the IRC excludes certain types of businesses. Among them are: Continue reading… Continue reading… Continue reading…