Does My Company Qualify for QSBS?
Your stock only qualifies if your company meets all IRC Section 1202 requirements. Here's what the IRS checks.
The Six Company Requirements
Domestic C-Corporation
The company must be a U.S. C-corporation at the time you acquire stock. S-corps, LLCs, partnerships, and foreign corporations do not qualify.
Watch out: Delaware C-corps are fine. But if your company started as an LLC and converted, only stock issued after conversion qualifies.
$50 Million Gross Assets Test
The company's gross assets must have been $50 million or less at all times from August 10, 1993, through immediately after your stock was issued.
Key point: This is measured at issuance, not at sale. Even if the company is worth billions when you sell, you can still qualify if it was under $50M when your stock was issued.
Active Business Requirement
At least 80% of assets must be used in the active conduct of one or more qualified trades or businesses.
These businesses DO NOT qualify:
- Professional services (law, health, engineering, accounting, consulting, financial services, performing arts)
- Banking, insurance, financing, leasing
- Farming, hotels, motels, restaurants
- Oil, gas, or mineral extraction
- Businesses whose principal asset is the reputation of employees
Original Issuance Requirement
You must have acquired the stock at original issuance (directly from the company), in exchange for money, property, or services. Stock purchased in the secondary market doesn't count.
Good news: Exercising options, receiving RSAs/RSUs, and SAFE conversions all count as original issuance.
No Significant Redemptions
The company cannot have made significant redemptions of its stock during certain periods relative to when you acquired your shares.
This is technical and rarely an issue for most startups. Your tax advisor can verify this requirement.
Reporting Agreement (Optional but Helpful)
While not strictly required, many companies execute QSBS reporting agreements to help shareholders document their eligibility.
Ask your company: "Can you provide a QSBS eligibility letter confirming the company met the requirements when my stock was issued?"
Quick Self-Check
Answer these questions about when you acquired your stock:
- Was the company a U.S. C-corporation?
- Did the company have $50M or less in gross assets?
- Is the business a technology/product company (not services)?
- Did you get stock directly from the company (not secondary)?
If you answered yes to all, your company likely qualifies. Get confirmation from your legal/tax team before sale.
Documentation You'll Need
The IRS may ask for documentation. Gather these before you sell:
- Stock certificates or issuance records showing dates and amounts
- Company financial statements showing gross assets at issuance
- Certificate of incorporation confirming C-corp status
- QSBS eligibility letter from the company (if available)
- Option exercise or RSU vesting documentation