Qualified Small Business Stock (QSBS)
- Laura Malone
- Jan 15
- 4 min read
You started a company from scratch, navigated it through pivots & market challenges, and have driven it to success. The business sale you desired is on the horizon. How do you manage that liquidity event in a way that you balance financial security with the ability to make a difference in the world with causes that are important to you?
Qualified Small Business Stock (QSBS) is a tool that can provide not only a tax break but become a financial engine that can drive future charitable impact.
This article will explain what QSBS is, the tax advantages it offers, and how it can help a business owner build a long-term charitable legacy.
Qualified Small Business Stock (QSBS) : What is It?
Sometimes referred to as Section 1202, it has been in existence as part of the Internal Revenue Code since 1993. Its purpose was to encourage long-term investment in startups and small businesses by incenting those who were willing to take on the risk & hardship of early-stage equity. QSBS allowed shareholders to exclude a portion of their capital gains from federal taxes when they sold their shares.
However, legislative changes in 2010, 2015 and 2025 supercharged the value of Section 1202, increasing the capital gains tax exclusion to 100% in many cases.
Eligibility criteria for QSBS includes:
C-Corporation Status: The company must be a domestic “C-corp”. S-corps and LLCs do not qualify.
Gross Asset Test: At the time the stock was issued, the aggregate gross assets of the company cannot exceed $50 million. The 2025 One Big Beautiful Bill Act (OBBBA) increased this test to $75 million for stock issued after July 4, 2025.
Active Business Requirement: At least 80% of the business’ assets must be used in active conduct of qualified trade. Certain industries are excluded from being considered a qualified trade, including:
o Banking, insurance, and leasing
o Farming
o Mining
o Hotels
o Restaurants
o Professional Services ( such as financial services, law, healthcare, accounting)
Original Issuance: The QSBS must be acquired directly from the company( i.e. as a founder, early employee, or early-stage investor) in exchange for money, services, or property. Stock purchased from another investor—rather than the company itself—is not eligible for the tax exclusion.
Holding Period: Originally, you had to hold the stock for 5 years to claim the exclusion. However, changes brough about by OBBBA in 2025 created a tiered system that now allows a 50% exclusion that is available after 3 years.
Tax Advantages of QSBS
The amount you can exclude is dependent upon when you acquired the stock:
There is an exclusion cap: For most of the existence of Section 1202, the exclusion was restricted to the greater of either $10 million or 10 times the investor’s original tax basis in the stock. In 2025, changes brought about by OBBBA raised the $10 million limit to $15 million.
As mentioned previously, the OBBBA revised the holding periods moving forward:
These revised holding periods apply only to QSBS acquired after July 4, 2025. Stock acquired prior to that date will still be subject to the original 5 year cliff.
Strategy 1: QSBS and a Charitable Remainder Trust
In this scenario, a company founder can create an irrevocable non-grantor trust. Unlike a grantor trust( such as living trust) in which the IRS would tax you personally, a non-grantor trust becomes a separate taxpayer. This allows a founder to “stack” their exclusions, allowing them to have a personal exclusion of up to $15 million, and their non-grantor trust can have an additional exclusion of up to $15 million.
A non-grantor trust such as a charitable remainder trust (CRT) can play an ideal role in providing income to the founder and their family as well making a charitable impact. Specific to the issue of QSBS, a charitable remainder unitrust (CRUT) can prove to be the ideal tool when compared to a charitable remainder annuity trust (CRAT):
Strategy 2: Direct Donation of QSBS to a Donor Advised Fund
A donor advised fund (DAF) is essentially a charitable investment account. Assets that go into can never leave unless they are used for charitable purposes. For a company founder who has held QSBS for more than 1 year, you are able to gain a double tax benefit:
Immediate Income Tax Deduction: Your deduction will receive the full Fair Market Value (FMV), pending a qualified appraisal to determine its value. That deduction can be used to offset other income.
Permanent Capital Gain Avoidance: Any gain above the QSBS exclusion cap of $10-$15 million would normally be liable for tax. However, by donating shares directly into a DAF, you will never pay tax on that additional investment growth, allowing your DAF to continue to grow its charitable wealth.
Next Steps
Do you want the next chapter in your life to be one that moves you from financial success to charitable significance? To what degree do you want to be involved personally & financially in trying to support causes that are important to you?
The process of using qualified small business stock to fund future charitable giving is complicated. Technical issues concerning timing of the business sale, tax considerations, and utilizing the most appropriate charitable vehicle are key considerations.
At Generosity Nexus, we can help you understand the depth of your charitable interests and navigate the complicated choices that can help you make an impact and manage your wealth in a tax-smart way.
Don’t hesitate to schedule an appointment to learn more about how we can help you.
