QSBS and Section 1202

    Section 1202 QSBS Planning for Investor-Ready and Acquisition-Ready Startups

    Kala Financial leads the formation, documentation, and exit planning that helps founders keep QSBS eligibility intact, working alongside your tax counsel and CPA.

    Last reviewed: October 2026. Reviewed by Chris McMorran, 15+ years advising businesses.

    The short answer

    Under the 2025 tax law, stock acquired after July 4, 2025 and held at least three years qualifies for a 50% gain exclusion, four years for 75%, and five years for 100%. The per-taxpayer cap is the greater of $15 million or 10x basis, indexed for inflation beginning in 2027, and the gross asset ceiling is $75 million.

    What changed and who it applies to

    QSBS gain exclusion by holding period
    Holding periodGain exclusion
    3 years50%
    4 years75%
    5 years or more100%

    The new holding tiers, the $15 million per-taxpayer cap, and the $75 million gross asset ceiling apply only to stock acquired or issued after July 4, 2025. Stock acquired earlier keeps the prior rules: a five-year hold, a cap of the greater of $10 million or 10x basis, and a $50 million asset ceiling.

    Does your company qualify?

    • The company is a domestic C corporation when the stock is issued.
    • You acquired the stock at original issuance, for cash, property, or services, not from another shareholder.
    • Gross assets were $75 million or less at and immediately after issuance (stock issued after July 4, 2025).
    • At least 80% of assets are used in an active qualified business during substantially all of the holding period.

    Excluded fields

    Businesses whose main asset is the reputation or skill of their people do not qualify. This includes:

    • Health
    • Law
    • Accounting
    • Consulting
    • Financial services and brokerage
    • Banking, insurance, farming, hotels, and restaurants

    What Kala does

    Kala leads the QSBS advisory work and coordinates the specialists. Your tax counsel confirms eligibility, and you make the final decisions.

    C corporation formation and LLC to C corporation conversion timing

    Gross asset tracking at each stock issuance

    Cap table and 83(b) election coordination

    A diligence-ready QSBS file for investors and acquirers

    Exit structuring, including why an asset sale can eliminate the benefit

    Coordination with your tax counsel and CPA

    California founders: read this first

    California does not conform to Section 1202. California residents still owe state income tax on the gain, even when the full federal exclusion applies. Not all states conform, so plan around your state of residence at the time of sale.

    QSBS questions founders ask

    Does my LLC qualify for QSBS?
    No. Only stock in a domestic C corporation can be QSBS. An LLC can convert to a C corporation, and the stock received on conversion can qualify going forward if the company meets the other requirements.
    Does converting an LLC to a C corp restart the holding clock?
    Yes. The holding period for QSBS starts when the C corporation stock is issued, not when the LLC was formed. Value built inside the LLC before conversion sets the starting basis and is not eligible for the exclusion.
    What happens to QSBS in an acquisition?
    A stock sale lets shareholders claim the exclusion on their shares. An asset sale is taxed at the corporate level, which can eliminate the benefit. Some stock-for-stock reorganizations can carry QSBS status into the buyer stock.
    Does California recognize QSBS?
    No. California does not conform to Section 1202, so California residents still owe state income tax on the gain even when the federal exclusion applies. Other states vary, so check your state of residence.
    How do I prove QSBS eligibility to an acquirer?
    Keep a QSBS file: issuance records, gross asset figures at each issuance, active business evidence, cap table history, and any 83(b) elections. Acquirers and their counsel ask for this in diligence.
    Which businesses are excluded from QSBS?
    Companies whose main asset is the reputation or skill of their people in fields such as health, law, accounting, consulting, financial services, and similar professional services are excluded, along with banking, farming, hotels, and restaurants.
    What are the new holding periods for QSBS?
    For stock acquired after July 4, 2025: three years for a 50% exclusion, four years for 75%, and five years for 100%. Stock acquired earlier keeps the prior five-year, all-or-nothing rule.
    What is the gross asset limit for QSBS?
    For stock issued after July 4, 2025, the corporation can have no more than $75 million in aggregate gross assets at and immediately after issuance. The prior limit was $50 million.
    Do I need a tax attorney for QSBS?
    Yes, alongside an advisor. Kala leads the planning and documentation and works with your tax counsel and CPA, who confirm eligibility and file the returns. You make the final decisions.

    Sources

    This page is general information, not tax or legal advice. Confirm eligibility with your tax counsel.

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    Important disclosures

    Kala Financial LLC is a business advisory and consulting firm and is not a law firm, CPA firm, registered investment adviser, broker-dealer, lender, or insurance carrier. Services are provided only under a written engagement agreement, and all credit decisions are made solely by lenders and capital providers.