QSBS: zero federal tax on up to $15M of your sale
Most owners of mid-market C-corporations have never heard of Section 1202. The ones who hear about it usually hear about it from a buyer's tax advisor in diligence, when it is too late to do anything about it. Under the right conditions, Section 1202 wipes out federal capital-gains tax on the first $15 million of your sale proceeds. The rules were just expanded by the One Big Beautiful Bill Act in July 2025, and the expansion brought a meaningfully larger group of mid-market owners into the room.
What QSBS actually is
QSBS stands for Qualified Small Business Stock. It is defined in Section 1202 of the Internal Revenue Code. When stock meets the qualifying tests and the holder meets the qualifying tests, the federal capital-gains tax on the sale of that stock is reduced or eliminated, up to a cap that is the greater of $15 million or 10 times the holder's basis in the stock.
Read that again. Not deferred. Not reduced by a credit. Eliminated. Federal long-term capital-gains tax on a qualifying $15 million sale: zero. Net Investment Income Tax: zero. The seller still owes state tax in most states (a few states like California do not conform), but the federal piece can be wiped out completely.
The five qualifying tests
QSBS is a strict regime. All five of these must be true for the stock to qualify. Miss any one and the exclusion disappears.
The new tiered hold period
Before OBBBA, the QSBS rule was binary. Hold five years, get 100% exclusion. Sell at four years and eleven months, get nothing. OBBBA changed that for stock issued after July 4, 2025. The new rule is a stair-step.
The stair-step matters because deal timing is rarely under the seller's control. An unsolicited offer can land at year three. An LOI can move a closing date six months sooner than planned. The pre-OBBBA rule meant a closing four months before the five-year mark cost the seller the entire exclusion. The new rule preserves at least 75% of it in that situation, which can be the difference between paying $1.6 million of federal tax on a $15 million sale and paying $4 million.
What changed on July 4, 2025
The One Big Beautiful Bill Act made three changes to Section 1202, all of which expand who can use it. The new rules apply to stock issued after July 4, 2025. Older stock is grandfathered under the old rules.
The gross-asset jump from $50M to $75M is the quiet headline. It means a company that grew past $50M three years ago, and would have been disqualified from issuing any new QSBS, can now issue new qualifying stock as long as it is still under $75M at issuance. That matters for owners who are bringing on partners, granting equity, or restructuring before a sale.
The S-corp and LLC problem
Most successful mid-market companies in the U.S. are organized as S-corporations or LLCs, not C-corporations. Both structures pass profits through to owners' personal returns and avoid the entity-level corporate income tax. They are usually the right choice for an operating business that distributes its earnings.
They are also categorically ineligible for QSBS. S-corp stock cannot qualify. LLC interests cannot qualify. Only stock in a domestic C-corporation qualifies.
This produces a real planning problem. The owner who built a successful operating business in the most tax-efficient way to run it (S or LLC) cannot use the most powerful tax-exclusion tool when selling it. The workaround is a pre-sale conversion to C-corp: the entity changes form, new C-corp stock is issued, and the five-year clock starts. The trade-off is that the corporation now pays entity-level income tax for as long as it remains a C-corp before the sale, which can be a material cost over a multi-year hold.
Whether the trade is worth it depends on the size of the expected gain, the projected income during the hold period, and how far away the sale is. A $20 million expected exit four years out, with modest interim profits, can favor conversion. A $5 million expected exit eighteen months out almost never does.
The disqualified industries
Even a perfectly structured C-corp under $75 million in gross assets does not qualify if its business falls into one of the excluded categories. The full list:
- Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, or financial services (any business where the principal asset is the reputation or skill of one or more employees)
- Banking, insurance, financing, leasing, investing, or similar activities
- Farming (including raising or harvesting trees)
- Production or extraction of products subject to percentage depletion (oil, gas, hard-rock mining)
- Operation of a hotel, motel, restaurant, or similar business
The personal-services exclusion is the one that catches owners by surprise. A consulting firm, an engineering firm, a law practice, or a medical group is out. A specialty manufacturer, a SaaS company, a distribution business, a non-restaurant food brand, a logistics company, an industrial services business, an environmental services firm: typically in, assuming the other tests are met.
The stacking move
The $15 million cap is per holder, per issuer. This is the seed of one of the most powerful estate-planning techniques in this part of the code.
If the QSBS owner gifts shares before sale to one or more non-grantor trusts (each treated as a separate taxpayer for income-tax purposes), each trust gets its own $15 million exclusion cap. A founder with a single $45 million expected exit can, in the right structure, gift shares to themselves, a spousal trust, and trusts for two children, and potentially shield $60 million of gain instead of $15 million. The technique is called "QSBS stacking" or "QSBS multiplication."
The execution is technical. The trusts must be properly structured non-grantor trusts. The gift must happen before any binding sale agreement. Each trust must have an independent purpose beyond tax avoidance. State law residency of the trusts matters. This is not a do-it-yourself maneuver, and the IRS has shown it can challenge stacking that lacks real substance, but when it is set up correctly years ahead of an exit, it can shield tens of millions of additional gain.
The Section 1045 rollover
What happens if a QSBS owner has to sell before the three-year mark? Section 1045 provides an emergency exit. If the seller reinvests the proceeds into other QSBS within 60 days of the sale, the gain is deferred (not eliminated), and the holding period of the original stock carries over to the new stock.
In practice, 1045 is mostly used by serial founders and venture investors who roll proceeds from one early-stage company into another. It is less useful for a one-time business sale, because the seller usually does not want to immediately put $15 million of after-tax-deferred proceeds into another small private C-corporation. But it is the right tool in the right hands, and worth knowing about.
Five questions to take to your tax advisor
- Is my business a C-corporation today? If not, the QSBS clock has not started and the first decision is whether to convert.
- What were the company's aggregate gross assets at every stock issuance, and what are they now? If you ever crossed $75 million, even briefly, no stock issued at or after that point qualifies.
- Does my industry pass the active-business test and avoid the disqualified categories? Personal-services and finance-adjacent businesses need an honest read here.
- When did I receive each block of my stock, and was it original-issue? The five-year (or three/four-year tiered) clock runs from each issuance date separately.
- Could non-grantor trust stacking multiply my $15 million cap, given my family situation and the time before a likely sale? Done early, this can shift millions of dollars of tax.
QSBS is the kind of planning that pays the most for owners who think about it years before the sale. By the time a banker is at the table, the structure decisions are largely locked. The window to open the planning conversation is the moment an exit becomes plausible, not the moment it becomes imminent.
Sources: Internal Revenue Code Section 1202 (Qualified Small Business Stock) and Section 1045 (rollover). One Big Beautiful Bill Act of 2025 (P.L. 119-21), Section 70431 (QSBS amendments). Deloitte M&A Tax Talk, "The One Big Beautiful Bill Act: Tax planning considerations for M&A transactions," September 2025. This article is educational and not tax advice. QSBS qualification involves fact-specific tests and should be reviewed with qualified tax counsel before any planning action.