What are the QSBS eligibility requirements?

Stock of a small business may qualify as QSBS if a number of requirements are met, including:

1. the stock is issued to a non-corporate stockholder (individual or pass-through, including an LLC taxed as a partnership or S-corporation);
2. the small business is a domestic eligible C corporation at the time the stock is issued;^[1]
3. the stock is acquired directly from the small business at its “original issuance” in exchange for money or other property (not including stock) or as compensation for services;^[2]
4. during substantially all of the time the stockholder holds the stock, the small business is engaged in a qualified trade or business and uses 80 percent (by value) of its assets in the active conduct of one or more qualified trades or businesses (as defined below);
5. the small business’s aggregate gross assets^[3] from inception to the date the stock is issued (including proceeds received in exchange for the stock) is $50 million ($75 million for stock issued after July 4, 2025, indexed for inflation) or less;
6. with certain de minimis exceptions, the small business has not made any repurchases of stock from any of its stockholders within the two-year period starting one year prior to the date the stock was issued; and
7. with certain de minimis exceptions, the small business has not repurchased any stock from the taxpayer claiming the QSBS gain exclusion or related parties within the four-year period starting two years prior to the date the stock was issued.

A “qualified trade or business” is generally defined as any trade or business other than: (i) any trade or business involving the performance of services in certain fields, such as accounting, engineering, consulting, financial services, brokerage services, or any other trade or business where the principal asset is the reputation or skill of one or more of its employees; (ii) any banking, insurance, financing, leasing, investing, or similar business; (iii) any farming business; (iv) any mining, oil, or gas business; and (v) any business of operating a hotel, motel, restaurant, or similar business.

 

^[1] A C corporation is a corporation taxed under Subchapter C of the IRC. An eligible issuer of QSBS is a domestic C corporation that is not (i) a domestic international sales corporation (DISC) or former DISC, (ii) a regulated investment company (RIC), (iii) a real estate investment trust (REIT) or real estate mortgage investment conduit (REMIC), or (iv) a cooperative or, under prior law, a corporation with respect to which an election under Section 936 is in effect or which has a direct or indirect subsidiary with respect to which such an election is in effect. Neither an S corporation nor a partnership for tax purposes (e.g., a multi-member LLC) can issue QSBS.

^[2] For purposes of the “original issuance” requirement, QSBS that is received in connection with the performance of services and subject to an election under Section 83(b) is treated as acquired on the effective date of the election.

^[3]“Aggregate gross assets” means the amount of cash and the adjusted tax bases of other property held by the issuing corporation (taking into account certain attribution and look-through rules). For this purpose, the adjusted tax basis of property contributed to the issuing corporation is its fair market value at the time of contribution.

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