If you are a business owner planning for the future, knowing about the “QSBS” exclusion could provide you with millions of dollars of capital gains tax savings when you sell your business. With the proper advice and advanced planning, this tax savings can be multiplied for businesses sold for more than $10 million.
The Qualified Small Business Stock (QSBS) exclusion is a powerful tax incentive under Section 1202 of the IRS tax code. It offers substantial capital gains tax exclusions for both business owners and investors in those businesses who meet specific criteria.
The QSBS exclusion was created in 1993 as part of the Revenue Reconciliation Act and recently enhanced through the One Big Beautiful Bill Act (OBBBA). The purpose of the QSBS exclusion is to promote entrepreneurship and innovation by channeling capital into small companies and rewarding owners of and investors in those businesses with favorable tax treatment.
As noted above, the amount of gain that can be excluded is substantial.
- If the stock was acquired between 1993 and 2008, the taxpayer can exclude 50% of the gain from the sale.
- If the stock was acquired in 2009 or part of 2010, then 75% of the gain can be excluded.
- If the stock was acquired in 2010 after the September 27, 2010 enactment of the Creating Small Business Jobs Act, the taxpayer can exclude 100% of the gain, up to the greater of $10M or ten times the basis.
- And for stock acquired on or after July 4, 2025, $15M of gain can be excluded.
So, does the company you own or invested in qualify, and what kind of capital gains exclusion is permitted under the incentive?
Capital gains may be excluded from the sale of QSBS stock when the following conditions are met:
- The entity must be structured as a C corporation for tax purposes, and the stock must have been issued on or after 8/10/93.
- The entity must be a qualified small business.
- When the stock was issued, the gross assets of the business cannot have exceeded $50 million. Note that this is assets, not the valuation of the entity.
- The stock must be an original issuance (not purchased from another investor).
- The stock must be held for more than five years.
For stock issued on or after July 4, 2025, the OBBBA made significant and favorable changes:
- Gross assets of the business cannot have exceeded $75M (up from $50M);
- Introduction of a tiered application for exclusion percentages:
- Hold for 3 years, you get 50%;
- Hold for 4 years, you get 75%; and
- Hold for 5 years, you get 100%.
- And perhaps most notably, the exclusion amount is raised from $10M to $15M
So, if the business fits the bill, how can you plan for sales larger than $10M or $15M to maximize your tax savings even further?
Through a process called “stacking,” business owners can increase the number of individuals or entities eligible for the exemption, increasing the tax benefit while also removing the asset from their taxable estate in the process.
For example, a business owner can gift a portion of their QSBS shares to their spouse or to a trust for their children, effectively multiplying the number of exemptions allowed. Their QSBS status and holding period then follow the shares to the recipient – the new taxpayer who receives the benefit of the 1202 exclusion when selling the shares. When a taxpayer makes gifts of shares to multiple trusts, each trust receives the benefit of the 1202 exclusion, hence the term “stacking.”
Collectively, the trusts and the taxpayer can then exclude gains equaling $10M, or $15M depending on the acquisition date, multiplied by the number of trusts established. This is a powerful strategy, saving several million dollars in taxes.
IRS rules and restrictions can be complex, making it important to check with a qualified financial advisor and tax professional when considering this tax incentive. But for business owners who qualify, taking advantage of the QSBS exclusion can be one of the most rewarding strategies for their financial future as well as the future of their heirs.
If you would like to learn more about the benefits of the QSBS tax provision, please reach out to your Crestwood team. If you are not yet working with Crestwood, please contact us to discuss your individual circumstances.
This document is provided for general informational purposes only by Crestwood Advisors, an investment adviser. Crestwood Advisors does not provide legal advice, and this document should not be construed as containing legal advice. For legal advice, consult with a licensed attorney. This document should not be construed as containing tax advice. For tax advice, consult with your tax adviser.
