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QSBS Eligibility Requirements: Do You Qualify?

By The Ledgerism Editorial Team · The Ledgerism Brief Editorial Team produces original, methodology-disclosed accounting and tax research—data trackers, databases, and reference guides built to be the most-cited source in the field. Every figure is verified against primary sources including FASB, the IRS, the PCAOB, NASBA, the AICPA, and state boards of accountancy.

The QSBS requirements are six separate tests, and stock has to pass every one to qualify for the Section 1202 gain exclusion. The corporation must be a domestic C corporation, hold no more than $75 million in aggregate gross assets when it issues the stock, run an active qualified trade or business, and stay out of the excluded industries. The shareholder must acquire the stock at original issuance and hold it long enough. Miss one test and the exclusion is gone.

This is a qualification checklist, not an exclusion calculator. For how much gain the exclusion actually shelters and the OBBBA worked example, see the Section 1202 QSBS exclusion guide. Here the question is narrower: does your stock meet the QSBS requirements in the first place?

The QSBS eligibility checklist at a glance

Qualified small business stock (QSBS) must satisfy all of these conditions at the same time. The table below is the fast screen; each test is detailed in the sections that follow.

Test 1: Domestic C corporation

The issuer must be a C corporation organized in the United States, both on the date the stock is issued and during substantially all of the shareholder’s holding period. S corporations, LLCs taxed as partnerships, and foreign corporations do not issue QSBS.

An LLC or S corp can still get there by converting to C corporation status. In that case the QSBS clock and the gross-assets test are measured from the conversion (the C corporation’s issuance of stock), not from the original founding. Stock held before the conversion generally does not qualify. If you are weighing structures, the business entity comparison lays out the C-corp trade-offs beyond QSBS.

Test 2: The $75 million gross-assets cap (OBBBA)

The corporation’s aggregate gross assets cannot exceed $75 million at any point before the issuance and immediately after it. This ceiling comes from the One Big Beautiful Bill Act (OBBBA) and applies to stock issued after July 4, 2025. Stock issued on or before that date uses the prior $50 million cap.

“Aggregate gross assets” means cash plus the aggregate adjusted bases of all other property the corporation holds. Property contributed to the corporation is counted at fair market value at contribution for this test, which can matter when founders drop in appreciated assets. The $75 million figure is indexed for inflation starting in 2027.

The cap is tested only up to and immediately after issuance. A company can later grow past $75 million (or $50 million) in assets, and stock that already qualified when issued keeps its QSBS status. Once the corporation crosses the ceiling, though, it can no longer issue new QSBS.

Test 3: The active-business and qualified-trade requirement

During substantially all of the holding period, at least 80% of the corporation’s assets (by value) must be used in the active conduct of one or more qualified trades or businesses. A passive holding company that mostly parks assets in investments fails this 80% test.

Working capital counts as active-business use, with a limit. Cash and investment assets held as reasonable working capital, or held for investment in near-term research and development or operating expansion, are treated as used in the active business. After the corporation has been operating for at least two years, no more than 50% of its assets can qualify under this working-capital rule, so a mature company sitting on a large cash pile can drift offside.

Two more asset limits apply. No more than 10% of net assets (by value) may be real property not used in the active business, and no more than 10% of total assets may consist of stock or securities in other corporations that are not subsidiaries.

Test 4: Excluded industries

A qualified trade or business is any business except the ones Section 1202(e)(3) carves out. The exclusions target service businesses that trade on personal reputation and skill, plus specific capital-intensive or financial sectors. If the company’s principal activity sits in one of these fields, its stock is not QSBS.

Manufacturing, wholesale, retail, and most technology and software businesses generally sit outside these exclusions and can qualify. The gray zone is a company that blends a product with services (for example, health-tech or fintech), where the analysis turns on whether the value comes from the product or from the skill of the people, and often needs a professional opinion.

Test 5: Original issuance

The shareholder must acquire the stock directly from the corporation at its original issue, in exchange for money, property (other than stock), or services. Stock bought on the secondary market from another shareholder does not qualify, because it fails the original-issuance rule even if every other test is met.

Stock received as compensation for services can qualify. Some transfers preserve QSBS status and its holding period, including gifts, transfers at death, and distributions from a partnership to a partner. Exercising options or converting a SAFE or convertible note counts as original issuance at the time the shares are actually issued, which is when the holding-period clock starts.

Watch corporate redemptions. If the company buys back significant stock from the shareholder near the issuance date (within a defined window before or after), the newly issued stock can be tainted and lose QSBS eligibility.

Test 6: Holding period

The shareholder must hold the stock for more than five years to claim the full exclusion. The clock starts on the issuance date. For stock issued after July 4, 2025, OBBBA added a phase-in: a partial exclusion becomes available at three and four years, with the full exclusion at five.

Stock issued on or before July 4, 2025 keeps the older five-year, all-or-nothing structure, and its exclusion percentage (50%, 75%, or 100%) depends on the original acquisition date. If a sale would land just short of the mark, a Section 1045 rollover can defer the gain by reinvesting in new QSBS within 60 days and tacking the holding period.

After you qualify: the per-issuer cap

Passing all six tests makes the stock QSBS. The exclusion itself is then capped per taxpayer per issuer at the greater of $15 million (for post-OBBBA stock) or 10 times the aggregate adjusted basis of the stock sold in the year. Founders and investors who expect to exceed that cap sometimes use QSBS stacking and packing to multiply the exclusion across trusts and family members.

Frequently asked questions

Can an LLC issue QSBS?

No. An LLC taxed as a partnership or disregarded entity cannot issue qualified small business stock, because QSBS requires a domestic C corporation. An LLC can convert to or elect C corporation status, after which the corporation can issue QSBS. The five-year holding period and the gross-assets test run from that conversion, not from the LLC’s original formation.

What is the gross-assets cap for QSBS in 2026?

For stock issued after July 4, 2025, the corporation’s aggregate gross assets cannot exceed $75 million before and immediately after issuance, under OBBBA. Stock issued on or before that date uses the prior $50 million cap. The $75 million figure is measured as cash plus the adjusted basis of other property and is inflation-indexed beginning in 2027.

Do consulting and professional-service firms qualify for QSBS?

Generally no. Section 1202 excludes businesses in health, law, engineering, accounting, consulting, financial services, brokerage, and any trade whose principal asset is the reputation or skill of its employees. It also excludes banking, insurance, farming, mining, oil and gas, and hotel or restaurant operations. Product-based technology, software, manufacturing, wholesale, and retail businesses usually qualify.

Does stock bought from another shareholder qualify as QSBS?

No. QSBS must be acquired at original issuance directly from the corporation, in exchange for money, property, or services. Secondary-market purchases from another investor fail the original-issuance requirement. Certain transfers, such as gifts, inheritances, and partnership distributions, can preserve QSBS status and carry over the holding period, but a straight purchase from an existing holder cannot.

How long do you have to hold QSBS?

More than five years for the full exclusion, measured from the issuance date. For stock issued after July 4, 2025, OBBBA phases in a partial exclusion: 50% at three years, 75% at four years, and 100% at five. Stock issued earlier keeps the five-year, all-or-nothing rule. A Section 1045 rollover can preserve the clock if you sell before hitting the threshold.

Can an S corporation issue QSBS?

No. Only a domestic C corporation can issue qualified small business stock. An S corporation would need to revoke its election and operate as a C corporation, and only stock issued by the C corporation qualifies. Shares held during the S corporation period do not become QSBS retroactively when the entity later converts.

Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.

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