What is QSBS?


Qualified Small Business Stock (QSBS) exclusion or Section 1202 stock allows business owners to potentially sell some or all of their business for little to no capital gains taxes owed if certain requirements are met. Given the tax benefits, the impact of QSBS can be significant but certain requirements must be met to qualify.

Tax Benefits of QSBS 

Normally, when an asset that has been held for more than one year is sold it is subject to long term capital gains rates of up to 20 percent. Section 1202 allows for an exclusion per taxpayer and per corporation the greater of: 

  • $10,000,000  
  • 10 times the aggregate adjusted basis in the qualifying small business 


Hypothetical Example: Tom starts a company, Tom’s Tech, and invests $1.5 million in the company in 2016.  His business meets all the requirements to qualify for QSBS and he receives an offer to sell his company for $16.5 million. Because he is able to exclude 10 times his basis under QSBS, he is able to exclude the entire gain. At a capital gains tax rate of 20 percent and including the 3.8 percent net investment income tax, this provides Tom with a tax savings upon sale of $3.57 million. 

QSBS Requirements 

To utilize the QSBS exclusion, a business must meet a number of requirements to qualify: 

  • Must be an active domestic C-Corp 
  • Assets must be below $50 million 
  • Business must not be involved in a prohibited industry 
  • Stock must be issued directly from the issuer (no secondary market purchases) 


There are a number of prohibited industries that cannot qualify for QSBS treatment.  These include: 

  • Perform services related to health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, finance, banking, insurance, leasing, investing, or brokerage 
  • Rely on an employee or owner’s reputation 
  • Produce products for which a depletion can be claimed (e.g. fossil fuels) 
  • Operate a hotel, motel, restaurant, or similar business 
  • Are a farming business 


As a shareholder in the business, there are also requirements that must be met to qualify for the exclusion: 

  • You cannot be a corporation. Individuals, trusts, and pass-through entities can benefit from QSBS treatment. 
  • You must hold the stock for over five years.  There is an exception to this rule if you held the stock for at least 6 months and proceeds are reinvested into another QSBS within 60 days. 

Financial Planning Considerations for QSBS 

Entity Type Considerations 

Once you have established that a business does not fall into a prohibited industry, entity type can often be a hurdle for business owners looking to receive QSBS treatment. 

In order to qualify, a business must be an active domestic C-Corp. Many small to medium sized businesses in the current tax regime are operated under S-Corp tax treatment for the potential tax benefits to the owner and the ability to avoid the double taxation that a C-Corp results in. 

It can be prudent to complete an analysis on the business of the different tax structures to determine whether a switch to C-Corp treatment in an effort to gain QSBS treatment is prudent. The switch to C-Corp begins the five year holding clock so an owner will also want to account for the sales timeframe before making any changes.

QSBS Trust Stacking 

If a business owner finds themselves in the fortunate position where they have gains greater than the QSBS threshold of $10 million or ten times adjusted basis, trust stacking can potentially be an opportunity to exclude greater gains. With this strategy can come trade offs around accessibility of funds so it is prudent to ensure that long term goals can still be met with potential limitations around use and access of funds. 

The limitations apply on a per-taxpayer basis meaning the creation of additional taxpayers can increase the limits. The process of creating these new taxpayers is called trust stacking. 

Essentially, gifts of stock can be made to certain trusts that are considered their own taxpayer for federal income tax purposes while retaining their basis and holding period. These gifts will count towards a grantors lifetime exemption but create a new taxable entity that can qualify for QSBS treatment separate from the individual. 

Disclosure: The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Michael Dunham, CFP® and not necessarily those of Raymond James. The content contained herein is for educational purposes only. The hypothetical case study is for illustrative purposes only. Individual cases will vary.  

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. 


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