Turbocharging Your Exit: Unlock $10M Tax-Free with QSBS

Designing a Small C-Corp for Long-Term Success and Maximum Gain Exclusion

Dear Visionary Entrepreneurs,

One of the most powerful incentives for startup founders and early-stage investors remains the Qualified Small Business Stock (QSBS) exclusion under Section 1202 of the Internal Revenue Code. In essence, QSBS can allow individuals who own qualifying stock in certain small C-corporations to exclude up to $10 million (or 10× their adjusted cost basis, whichever is greater) of capital gains from federal taxes—potentially saving millions of dollars in one fell swoop.

If you’re an entrepreneur with ambitious growth targets, understanding how QSBS works—and structuring your company to qualify—can be a game-changer. Below is a deep dive into advanced QSBS considerations for 2025 and beyond, along with more concrete illustrations to show how it all adds up.

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Why QSBS Remains a Big Deal in 2025 (and Beyond)

While some tax breaks fade or get scaled back, QSBS has retained strong bipartisan support due to its intended purpose: spurring investment in early-stage U.S. businesses. In many cases, it’s not just about the founder’s exit. If they receive and hold qualifying stock, investors, key employees, and even certain advisory board members can capitalize on this valuable benefit.

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Core QSBS Requirements—A Quick Refresher

Before tackling advanced topics, it’s essential to remember the pillars of QSBS:

1. C-Corp Mandate

   • Your startup must be a U.S. C-corporation—LLCs, S-corps, or partnerships can’t issue QSBS.

   • If you’re an LLC raising venture capital, you may convert into a C-corp early to avoid losing the QSBS window.

2. Gross Assets Under $50 Million

   • The corporation’s aggregate gross assets must be $50 million or less when stock is issued.

   • This threshold includes cash contributions and any property exchanged for stock.

3. Qualified Active Business Test

   • At least 80% of corporate assets must be used in an active business.

   • Purely service-oriented fields like legal, consulting, finance, and real estate development typically don’t qualify.

4. Original Issuance

   • Shares must be acquired directly from the company for money, property (other than stock), or services.

5. Five-Year Holding Period

   • You must hold your shares for at least five years to claim the full benefit.

   • If you sell earlier, the exclusion may not apply, though Section 1045 rollovers can preserve some or all potential benefits.

6. Stock Sale Requirement

   • Generally, for QSBS to flow to shareholders, the exit must be a stock sale rather than an asset sale by the company.

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Going Beyond the Basics: Advanced QSBS Strategies