Section 1202 QSBS: $10M and $15M Limits, Holding Periods and Eligibility

Section 1202 can permanently exclude some or all of an eligible noncorporate taxpayer's gain on the sale of Qualified Small Business Stock (QSBS). The amount depends on the stock's acquisition date, holding period, basis, and the taxpayer's prior use of the per-issuer limit. A sale of company assets does not itself qualify for this shareholder stock-gain exclusion.

The July 4, 2025 law expanded QSBS benefits. This guide separates the historical rules from the newer rules rather than treating $10 million, $50 million in gross assets, or a five-year holding period as universal requirements. The acquisition-date tests for the exclusion and the issuance-date test for the corporate asset threshold must be checked separately.

What Is Qualified Small Business Stock?

QSBS generally must be stock originally issued after August 10, 1993 by a qualifying domestic C Corporation, acquired at original issuance for money, property other than stock, or qualifying services. Ordinary secondary-market purchases generally do not qualify. Statutory exceptions can preserve eligibility in qualifying gifts, transfers at death, conversions, and certain reorganizations.

The exclusion is available to taxpayers other than corporations. A partnership or S Corporation can hold qualifying C Corporation stock and pass eligible gain through to qualifying owners under Section 1202(g); its own equity is not QSBS merely because it holds that stock. An LLC's federal tax classification matters. See AE Tax Advisors books and reading resources for related entity-planning guidance.

QSBS Rules Before and After July 4, 2025

The dollar amounts above are starting limits, not guaranteed exclusions. Section 1202(b) compares the remaining applicable dollar limit with ten times the qualifying adjusted basis of stock from that issuer disposed of during the taxable year. The greater amount caps eligible gain before the applicable exclusion percentage is applied. Acquisition dates are determined with Section 1223 holding-period rules, so a later gift or other qualifying transfer does not automatically move old stock into the newer regime.

The Three-, Four- and Five-Year Holding Periods

For stock acquired on or before July 4, 2025, Section 1202 requires a holding period of more than five years. Stock acquired after September 27, 2010 through July 4, 2025 generally receives a 100% exclusion of eligible gain within the cap. Stock acquired after February 17, 2009 through September 27, 2010 generally receives 75%, and earlier eligible stock generally receives 50%, with special rules for certain empowerment-zone stock. Older partial-exclusion stock may also raise alternative minimum tax issues.

For stock acquired after July 4, 2025, the exclusion is 50% at three years, 75% at four years, and 100% at five years or more. A sale before three years does not qualify for this exclusion. Track actual acquisition and issuance records, vesting and any Section 83(b) election where relevant, plus applicable holding-period tacking rules; the incorporation date alone is insufficient.

Section 1045 may offer a separate deferral election if a noncorporate taxpayer sells QSBS held for more than six months and purchases replacement QSBS within the 60-day period beginning on the sale date. Full deferral generally requires replacement cost at least equal to the amount realized, not just the gain. This is conditional rollover relief, not an automatic exclusion or a guarantee that replacement shares qualify.

Eligible Businesses and the $50 Million or $75 Million Asset Test

For stock issued on or before July 4, 2025, the corporate aggregate gross-assets ceiling is $50 million. For stock issued after that date, it is $75 million, with inflation adjustments for taxable years beginning after 2026. The applicable ceiling must be satisfied at all relevant times before issuance and immediately afterward, including the proceeds of the issuance. Predecessor and parent-subsidiary controlled-group aggregation rules also matter.

Aggregate gross assets generally means cash plus adjusted tax bases of other property, rather than enterprise value or net assets after debt. Contributed property is treated using fair market value at contribution for this test. A low historic tax basis in contributed assets therefore does not automatically establish qualification.

During substantially all of the holding period, the issuer generally must remain a C Corporation and satisfy the active-business requirements, including use of at least 80% of assets by value in qualified active businesses. Special working-capital, subsidiary, investment-asset, and real-estate rules apply. Certain redemptions around issuance can disqualify stock.

Excluded businesses include health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services, and businesses whose principal asset is employee reputation or skill. Banking, insurance, financing, leasing, investing, farming, specified extraction businesses, and hotel, motel, restaurant or similar operations are also excluded. Technology, manufacturing, retail and e-commerce businesses may qualify, but industry labels alone do not establish eligibility.

The Greater of the Dollar Limit or 10x Basis

The statute uses the greater of the applicable dollar limit or ten times qualifying basis. For older stock, the $10 million dollar limb is reduced by prior eligible gain taken into account from the same issuer, including gain from newer stock. For newer stock, the $15 million starting amount is reduced by prior eligible gain from that issuer across both regimes and by eligible gain from older stock taken into account in the same year. The two dollar limits cannot simply be added together.

The 10x limb uses the aggregate adjusted basis of QSBS from that issuer disposed of during the taxable year, disregarding additions to basis after original issuance. Later capital contributions do not simply increase this limb for existing shares. Inflation adjustments to the newer dollar limit begin for taxable years after 2026; a special rule prevents a later inflation increase from reopening that dollar limb once the statutory limit-reached condition applies.

QSBS Exclusion Examples

These illustrations assume an eligible noncorporate taxpayer, no prior eligible gain from the issuer, no separate-return reduction, and all other requirements satisfied. Newer-stock examples use the unindexed $15 million starting amount to show the mechanics; the actual sale-year indexed amount must be checked.

Older stock: A founder acquired qualifying stock in 2020 for $200,000 and sells it in 2026, after more than five years, for $12 million. Gain is $11.8 million. The greater of the remaining $10 million dollar limit and $2 million (10 times basis) is $10 million. With a 100% exclusion percentage, $10 million is excluded and $1.8 million remains outside the exclusion.

Newer stock: Assume qualifying stock acquired after July 4, 2025 has $500,000 basis and produces $12 million of gain. The unindexed greater-of cap is $15 million versus $5 million under the basis limb, so all $12 million is within the cap. A sale after three but before four years excludes $6 million; after four but before five years, $9 million; at five years or more, $12 million. These are alternative sale scenarios, not cumulative exclusions.

Higher basis: With $2 million of qualifying original-issue basis in shares sold in one year, the 10x limb is $20 million. If eligible gain is $20 million and the applicable dollar limb is lower, a 100% holding-period percentage can exclude $20 million; a 50% percentage excludes $10 million. The cap on eligible gain and the amount actually excluded are different calculations.

Tax savings depend on the taxable alternative, income, acquisition date, and state conformity. The taxable portion of partially excluded Section 1202 gain can fall under the special 28% capital-gain rate rules, and net investment income tax may apply. A flat 23.8% savings assumption is not appropriate for every QSBS transaction.

Multiple Shareholders, Spouses and Trusts

The per-taxpayer, per-issuer structure can support planning among separate eligible owners, but a married couple does not automatically receive two full dollar limits on a joint return. Married filing separately generally halves the dollar limb to $5 million for older stock or half the applicable newer-stock amount. Eligible gain on a joint return is allocated equally between spouses for subsequent-year limit calculations; the 10x basis alternative must also be evaluated.

Qualifying gifts and transfers at death can preserve QSBS status and holding periods, but gifts do not reset the stock's acquisition date into the post-July 4, 2025 regime. Trust treatment depends on whether the trust is a separate taxpayer and on grantor-trust, multiple-trust, assignment-of-income and other applicable rules. A separate exclusion is not guaranteed for every recipient or trust. Review ownership, prior exclusions, gift and estate consequences, and the sale process before implementing transfers.

Planning Strategies for QSBS Eligibility

Evaluate QSBS at formation and at each issuance. Model the applicable acquisition regime, likely exit timing, asset threshold, and stock-sale versus asset-sale economics. A partial exclusion after three or four years may help newer stock, but waiting five years can materially change the result.

Converting an S Corporation to a C Corporation does not retroactively turn existing shares into QSBS. Newly issued shares require a separate eligibility analysis, including the substantially-all C Corporation requirement. Incorporating a partnership or LLC also requires review of contributed-property valuation, built-in gain, acquisition date, and basis rules. Entity conversion is not a shortcut to a guaranteed exclusion.

For each stock lot, retain issuance and acquisition dates, consideration and original basis, stock certificates and capitalization records, asset-test calculations before and immediately after issuance, contributed-property values, redemption history, and ongoing active-business evidence. Later asset growth alone does not retroactively fail the issuance asset test, but ongoing operational requirements remain relevant.

Plan the Exit with AE Tax Advisors

Section 1202 can produce substantial federal savings, but the right answer depends on stock dates and facts. Distinguish the $10 million and $15 million dollar regimes, preserve the greater-of-10x-basis calculation, apply the correct holding percentage, and test the issuer under the correct $50 million or $75 million issuance threshold. State tax treatment requires a separate review.

For business owners building toward an exit or reviewing existing C Corporation stock, AE Tax Advisors can help assess eligibility, documentation, and transaction structure before a sale.

Statutory Sources and Review Date

Reviewed November 4, 2026 against IRC Section 1202, including subsections (a), (b), (c), (d), (e), (g), (h) and (i), and the effective-date notes for Public Law 119-21, Section 70431. The holding-period and dollar-limit amendments generally apply to taxable years beginning after July 4, 2025; the increased asset threshold applies to stock issued after that date. The rollover discussion is governed separately by IRC Section 1045. This article provides general education, not an opinion that any particular stock qualifies.