QSBS FAQs: Frequently Asked Questions About Qualified Small Business Stock

This page addresses the most frequently asked questions about Qualified Small Business Stock (QSBS) and Section 1202 exclusions. Each question is answered with references to relevant code sections and regulations, with cross-references to more detailed pages where applicable.

General QSBS Questions

What is QSBS?

Answer: Qualified Small Business Stock (QSBS) is stock in a C corporation that meets specific requirements under Section 1202, allowing investors to exclude a significant portion (often 100%) of capital gains from federal income tax.

QSBS must be:

• Stock in a qualified small business (C corporation with assets ≤$75 million)
• Acquired at original issue
• Held for the required period (3-5 years depending on acquisition date)

For detailed information, see QSBS Basics & Overview.

How much can I exclude?

Answer: The exclusion percentage depends on when the stock was acquired and how long it has been held:

Stock acquired on or before July 4, 2025:

• 50% exclusion if held for more than 5 years
• (Special rules: 75% for Feb 18, 2009 - Sept 27, 2010; 100% for stock acquired after Sept 27, 2010)

Stock acquired after July 4, 2025:

• 50% exclusion if held for at least 3 years
• 75% exclusion if held for at least 4 years
• 100% exclusion if held for 5 years or more

There is also a per-issuer dollar limit: $10 million (pre-applicable date) or $15 million (post-applicable date) per issuer.

For complete details, see QSBS Exclusion Rules (Section 1202).

What is the per-issuer limit?

Answer: The exclusion is limited per issuer (corporation) to the greater of:

• $10 million (for stock acquired on or before July 4, 2025) or $15 million (for stock acquired after July 4, 2025), or
• 10 times your adjusted basis in the QSBS

This limit applies per issuer, meaning you can exclude gains from multiple different QSBS issuers, subject to each issuer's separate limit.

For details, see QSBS Exclusion Rules (Section 1202).

Eligibility Questions

Can S corporations qualify?

Answer: No. QSBS must be stock in a C corporation. S corporations, partnerships, LLCs, and other entities do not qualify as QSBS issuers. [IRC §1202(e)(4)]

What is the asset test?

Answer: The issuing corporation's aggregate gross assets must not exceed $75 million (increased from $50 million for stock issued after July 4, 2025) at all times from August 10, 1993, through the date of stock issuance, and immediately after issuance. [IRC §1202(d)(1)]

For details, see QSBS Qualified Small Business Requirements.

Can I buy QSBS on the secondary market?

Answer: No. QSBS must be acquired at original issue directly from the corporation (or through an underwriter). Stock purchased on the secondary market does not qualify, even if the issuing corporation otherwise meets QSBS requirements. [IRC §1202(c)(1)(B)]

What businesses are excluded?

Answer: Certain businesses are ineligible, including:

• Professional services (law, accounting, consulting, health, engineering, etc.)
• Financial services (banking, insurance, financing, leasing, investing)
• Farming
• Natural resource extraction
• Hospitality (hotels, motels, restaurants)
• Any business where the principal asset is the reputation or skill of employees

For complete list, see [IRC §1202(e)(3)].

Holding Period Questions

How long must I hold QSBS?

Answer: The holding period depends on when the stock was acquired:

• Stock acquired on or before July 4, 2025: Must be held for more than 5 years
• Stock acquired after July 4, 2025: Must be held for at least 3 years (with exclusion percentage increasing with longer holding periods)

For details, see QSBS Exclusion Rules (Section 1202).

Does the holding period transfer if I receive QSBS as a gift?

Answer: Yes. Section 1202(h) provides that for transfers by gift, death, or from partnerships, the transferee is treated as having held the stock during the continuous period it was held by the transferor. [IRC §1202(h)(1)]

For details, see QSBS Transfers and Conversions.

Partnership Questions

Can I hold QSBS through a partnership?

Answer: Yes. Section 1202(g) allows QSBS benefits to flow through to partners when QSBS is held by a partnership, provided the partner held an interest in the partnership from the time the QSBS was acquired through disposition. [IRC §1202(g)]

For comprehensive information, see QSBS and Partnerships.

Can carried interest holders claim QSBS benefits?

Answer: This is uncertain for Section 1202 exclusions. The statute uses "an interest" language, which supports eligibility. However, Regulation 1.1045-1(d) requires capital interests for Section 1045 rollovers, creating uncertainty about whether a similar requirement applies to Section 1202.

For detailed analysis, see QSBS and Carried Interest.

Rollover Questions

Can I defer QSBS gains?

Answer: Yes, under Section 1045, you can defer gain from the sale of QSBS by rolling the proceeds into replacement QSBS within 60 days. [IRC §1045(a)]

For complete information, see QSBS Rollovers (Section 1045).

What is the 60-day rule?

Answer: Under Section 1045, replacement QSBS must be purchased within 60 days beginning on the date of the sale of the original QSBS. This is a strict deadline—stock purchased on day 61 does not qualify. [IRC §1045(a)(1)]

Tax Reporting Questions

How do I report QSBS on my tax return?

Answer: QSBS gains and exclusions are reported on Form 8949 and Schedule D. The excluded portion is not included in taxable income. You must maintain documentation to substantiate QSBS status.

For details, see QSBS Reporting Requirements.

Do I need to file any special forms?

Answer: Generally, QSBS is reported on standard capital gains forms (Form 8949, Schedule D). However, you should maintain detailed records documenting:

• QSBS qualification
• Holding period
• Acquisition method (original issue)
• Corporate eligibility
• Any other relevant facts

State Tax Questions

Does Section 1202 apply to state taxes?

Answer: Section 1202 is a federal tax provision. State treatment varies:

• Some states conform to federal QSBS exclusion rules
• Some states (including California and New Jersey) do not conform
• You may owe state tax on gains excluded for federal purposes

Check your state's tax laws for specific rules.

Planning Questions

Can I use both Section 1045 rollover and Section 1202 exclusion?

Answer: Yes, but they work differently:

• Section 1045 defers gain (reduces basis in replacement stock)
• Section 1202 excludes gain (permanent exclusion)

You could use Section 1045 to defer gain, then later claim Section 1202 exclusion when the replacement stock is sold (if holding period requirements are met).

For planning strategies, see QSBS Planning Strategies.

Can I maximize QSBS benefits through multiple issuers?

Answer: Yes. The per-issuer limit applies separately to each issuer. If you hold QSBS from multiple qualified small businesses, you can exclude gains from each, subject to each issuer's separate limit ($10 million or $15 million, depending on acquisition date).

Common Mistakes

What are common QSBS mistakes?

Answer: Common mistakes include:

• Buying stock on the secondary market (must be original issue)
• Not meeting the holding period requirement
• Failing to meet active business requirements during holding period
• Exceeding per-issuer limits
• Inadequate documentation
• Not understanding state tax implications

For comprehensive coverage, see QSBS Common Issues and Pitfalls.

Recent Changes

What changed in 2025?

Answer: Significant changes were enacted through Pub. L. 119-21 (July 4, 2025):

• Gross asset threshold increased from $50 million to $75 million
• Per-issuer limit increased from $10 million to $15 million (for post-applicable date stock)
• Minimum holding period reduced to 3 years (for post-applicable date stock)
• Tiered exclusion percentages introduced (50% at 3 years, 75% at 4 years, 100% at 5 years)

For complete details, see QSBS Recent Changes and Updates.

Key Takeaways

1. QSBS requires original issue: Cannot buy on secondary market

2. Holding period matters: 3-5 years depending on acquisition date

3. Per-issuer limits apply: $10-15 million per issuer

4. Only C corporations qualify: S corps, partnerships, LLCs do not

5. State taxes may still apply: Section 1202 is federal only

6. Documentation is critical: Maintain records to substantiate QSBS status

Sources and Citations

• IRC Section 1202: Partial exclusion for gain from certain small business stock
• IRC Section 1045: Rollover of gain from qualified small business stock
• IRC Section 1202(g): Pass-through entity treatment
• IRC Section 1202(h): Transfers by gift and death
• Reg. 1.1045-1: Partnership rollover rules

Verification Date: January 2025

Note: These FAQs provide general information based on current law as of January 2025. Tax law is complex and changes frequently. This information should not be construed as legal or tax advice. Consult with a qualified tax professional regarding your specific situation. Each situation is unique, and professional advice tailored to your circumstances is essential.