Qualified Small Business Stock (QSBS)

What is qualified small-business stock? #

Qualified small business stock (also known as QSBS or Section 1202 stock) is a provision in the tax code that provides some tax benefits for individuals that invest in early-stage companies. When shareholders sell or exchange their qualified stock, the exclusion can provide a break on capital gains tax—potentially up to 100% exclusion of tax on capital gains.

QSBS rules for eligibility #

Qualified small businesses are those that meet the following qualifications:

  1. 1.The company must be incorporated as a U.S. C-corporation.
  2. 2.The company must have had gross assets of $50 million or less at all times before and immediately after the equity was issued.
  3. 3.The company must not be on the list of excluded business types.

For purposes of the QSBS exclusion, a qualified trade or business (QTB) does not include performing services in certain fields: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business in which the principal asset is the reputation or skill of one or more of its employees. The definition of a QTB also excludes any business in banking, insurance, financing, leasing, investing, or farming, and any hotel, motel, or restaurant.

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