TradeExit Guide

Section 1202 (QSBS) and selling your business

Section 1202 can exclude up to 100% of the gain on qualified small business stock, but only for original-issue C corporation stock held long enough, in a qualifying active business. Most owner-operated trade and practice businesses are LLCs or S corporations, and health, accounting and similar service fields are excluded, so QSBS rarely applies to them.

Updated 2026-09-23 · 3 sources · By the TradeExit Guide team

Rules for stock issued after July 4, 2025 (OBBBA) vs before

RuleIssued after July 4, 2025Issued before
Exclusion50% after 3 years, 75% after 4, 100% after 5100% after 5 years (for stock acquired after Sept 27, 2010)
Per-issuer cap$15M (indexed) or 10x basis$10M or 10x basis
Corporate gross assets test$75M (indexed)$50M
EntityC corporation onlyC corporation only

Why most trade businesses miss out

  • Wrong entity. S corporation and LLC interests are not QSBS. Converting to a C corporation starts a new holding period and may bring C corporation tax costs.
  • Excluded fields. Section 1202(e)(3) excludes businesses in health, law, accounting, consulting and others, and any business whose principal asset is the reputation or skill of its employees. Dental, veterinary, medical and CPA practices are generally out.
  • Asset sales. QSBS applies to selling the stock; a C corporation selling its assets pays corporate tax first.

Home-services companies organized as C corporations may qualify in some cases - that is a question for a tax attorney before you structure the deal.

Example

A founder buys original-issue C corporation stock for $100,000 in August 2025 and sells it for $5.1M in September 2029 (4+ years): under the post-OBBBA tiers, 75% of the $5M gain could be excluded if every requirement is met. Held to September 2030, 100% could be excluded. Illustrative only.

See your after-tax number without QSBS

Asset vs stock, allocation, NIIT and state tax.

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Frequently asked questions

What is Section 1202?

A federal provision that lets holders of qualified small business stock in a C corporation exclude part or all of their gain on sale, subject to holding periods and caps.

Did the One Big Beautiful Bill change QSBS?

Yes, for stock issued after July 4, 2025: tiered exclusions at 3, 4 and 5 years, a $15M cap and a $75M gross assets test.

Does QSBS apply to S corporations or LLCs?

No. Only stock of a C corporation can qualify.

Sources

  1. 26 U.S.C. 1202 - Partial exclusion for gain from certain small business stock (Cornell LII) (accessed 2026-09-23)
  2. The Tax Adviser (AICPA) - QSBS gets a makeover: Sec. 1202 after OBBBA (Nov 2025) (accessed 2026-09-23)
  3. Baker Tilly - Changes to section 1202 in the One Big Beautiful Bill Act (accessed 2026-09-23)
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