Section 1202 lets an eligible shareholder exclude a significant portion of gain — potentially all of it — from federal income tax on the sale of qualifying stock. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the benefit substantially larger: the exclusion cap rose from $10 million to $15 million per taxpayer per issuer, and the company-level gross assets ceiling rose from $50 million to $75 million. None of it works retroactively, though — QSBS status is locked in at issuance, based on documentation that either exists from day one or doesn't exist at all.
Confirm which regime applies
Determine the stock's issuance date — the OBBBA's expanded terms only apply to stock issued after July 4, 2025
For stock issued on or before that date: $10 million exclusion cap, $50 million gross assets test, flat five-year hold for the full exclusion
For stock issued after that date: $15 million exclusion cap, $75 million gross assets test, tiered holding period
Confirm company eligibility
Verify the company is a domestic C corporation — non-negotiable, and not fixable retroactively
Confirm aggregate gross assets stayed under the applicable threshold ($50M or $75M) both before and immediately after the stock's issuance
Confirm at least 80% of company assets are used in an active, qualified trade or business
Rule out excluded business types — certain professional services, banking, farming, and hospitality among them
Check for disqualifying stock redemptions in the periods surrounding issuance
Confirm the holding period and exclusion percentage
Post-OBBBA stock: 50% exclusion at 3 years, 75% at 4 years, 100% at 5 years
Pre-OBBBA stock: full exclusion requires a straight five-year hold, no partial credit for shorter periods
If the holding period isn't met yet, evaluate a Section 1045 rollover — reinvesting proceeds into new QSBS within 60 days can preserve the benefit
Note that gain exceeding the exclusion isn't simply lost — it's taxed at a special 28% rate plus the 3.8% NIIT
Confirm the client's specific eligibility
Confirm the stock was acquired at original issuance, not purchased on the secondary market
For gifted or inherited shares, confirm the exclusion generally carries over to the new holder along with the original holding period
Reconfirm eligibility separately for each issuer if the client holds QSBS from more than one company
Stack and multiply the exclusion
Remember the cap applies per taxpayer, per issuer — a spouse holding separate qualifying shares has a separate cap
Consider gifting shares into irrevocable trusts for children, each potentially carrying its own exclusion
Check any trust structure against the newer anti-abuse provisions aimed at excessive trust stacking before relying on it
Document everything — starting at issuance, not at exit
Confirm proper C-corp formation and stock certificates that establish the issuance date
If restricted stock is involved, confirm the 83(b) election was filed within 30 days of issuance — this starts the QSBS clock and cannot be corrected after the fact
Request a QSBS representation letter from the company confirming Section 1202 qualification at the time of issuance
Maintain records supporting the gross assets test, active business requirement, and holding period
Check state conformity — some states modify or fully disallow the federal exclusion
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