A practical walkthrough of Qualified Small Business Stock — who qualifies, how much is shielded, and the traps Florida founders miss.
Reflects post-2024 IRS guidance and the 2025 amendments to IRC § 1202.
The headline
Section 1202 of the Internal Revenue Code — Qualified Small Business Stock, or QSBS — lets founders and early investors in a U.S. C-corporation exclude up to the greater of $10 million or 10x basis of gain from federal capital gains tax, provided the stock was held more than five years and the company met the ‘qualified small business’ criteria when the stock was issued.
For a Florida founder who sells her Delaware C-corp for $12 million after six years, properly planned QSBS can mean paying federal capital gains tax on only $2 million of gain instead of $12 million. Florida’s lack of state capital gains tax compounds the benefit: the $10 million of excluded gain is effectively tax-free at both levels.
Five requirements, one at a time
1. The company must be a C-corporation
LLCs don’t qualify. S-corporations don’t qualify. If your entity is not a C-corp when the stock is issued, there is no QSBS. This is the #1 reason Florida founders miss out — they form an LLC, operate for four years, convert to a C-corp on the way to a Series A, and only then discover the five-year clock started over on the converted basis.
2. Gross assets of $50 million or less at issuance
The company must have had aggregate gross assets of $50 million or less immediately after the stock was issued (and at all times before). ‘Gross assets’ means the cash and the adjusted basis of other property held by the company, with contributed property valued at fair market value for this purpose. Post-issuance growth beyond $50M does not disqualify the stock — the test is measured at issuance.
3. Qualified trade or business
The company must be engaged in a ‘qualified trade or business,’ which excludes services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any other trade or business where the principal asset is the reputation or skill of one or more employees. Also excluded: banking, insurance, financing, leasing, investing, farming, extraction of natural resources, and operating a hotel, motel, or restaurant. Most software, biotech, consumer product, and platform companies qualify.
4. Originally issued stock
The shareholder must have acquired the stock at original issuance — directly from the company — in exchange for money, property (not stock), or services. Buying someone else’s shares on the secondary market does not qualify, with narrow exceptions for gifts, inheritance, and certain partnership distributions.
5. Five-year holding period
The stock must be held more than five years before sale. The holding period includes time held by a decedent (for inherited stock), by the transferor (for gifts), and by certain partnerships. Section 1045 rollovers — reinvesting proceeds into new QSBS within 60 days — can preserve the clock across a portfolio.
How much is excluded
The exclusion per shareholder per company is the greater of $10 million or 10x the shareholder’s aggregate adjusted basis in the stock. The exclusion is 100% for stock acquired after September 27, 2010, that meets the other requirements. Prior to that date, partial exclusions applied — a detail relevant mostly for long-held early-stage investments.
The 10x-basis option. If you put $3 million of cash or property into a company at issuance, your cap is $30 million of excluded gain (10x basis), not $10 million. This often matters most for founders who contribute intellectual property worth more than cash, and for later investors with larger check sizes.
How Florida’s tax regime amplifies the benefit
Florida has no state personal income tax and no state capital gains tax. So the excluded gain under § 1202 is federally excluded and automatically state-free for Florida residents. Compare a California founder, who would pay California capital gains tax on the same exit despite the federal exclusion: Florida residence alone can move the effective tax savings by 10–13 percentage points on a large exit.
This is why Florida has become a destination for founders planning a high-value exit. But moving to Florida after a letter of intent is signed will not relieve California tax; the California source rules look at where the work was done and when residency was established.
Planning moves that matter
Stack the exclusion with family gifts
The $10M / 10x cap is per shareholder. Gifting shares to a spouse, children, or trusts — each of whom becomes a separate shareholder — can multiply the total QSBS exclusion available to the family, while also moving future appreciation out of the parent’s estate. This planning is most effective when done years before a sale, at a time when the shares’ fair market value is low enough to fit within lifetime gift exemption.
Non-grantor trusts for multi-exclusion stacking
An irrevocable non-grantor trust is treated as its own taxpayer for QSBS purposes. Carefully drafted trusts can hold QSBS and claim their own $10M exclusion. This is the most common ‘stacking’ strategy we see for founders expecting a nine-figure exit. Trust planning must be completed before the five-year clock runs to preserve the holding period.
Section 1045 rollovers
If you need to sell QSBS before the five-year mark, you can sometimes defer gain by rolling proceeds into replacement QSBS under § 1045. This is a complex election with strict 60-day rules; plan with your tax advisor before selling.
The traps Florida founders hit most often
- Forming an LLC first, then converting to a C-corp without understanding the basis reset and the new five-year clock.
- Redemptions and repurchases that ‘taint’ newly issued stock under the significant-redemption rules of § 1202(c)(3).
- Secondary-market sales and tender offers to existing shareholders — which generally do not result in QSBS for the buyer.
- Professional-services businesses (law firms, medical practices, consulting firms) that assume their corporation qualifies when the statute says otherwise.
- Gifting too late to take full advantage of multiple exclusions per family member.
- Failing to keep contemporaneous documentation of the $50M gross-assets test at each issuance date.
Frequently asked questions
Frequently asked questions
Do LLCs qualify for QSBS?
No. QSBS is available only for C-corporation stock. An LLC can convert to a C-corp, but the five-year holding period generally starts over as of the conversion for the converted basis.
I live in Florida. Is QSBS available to me?
Yes. QSBS is a federal tax rule; your state of residence doesn’t change eligibility. Florida residency is an additional benefit because Florida imposes no state capital gains tax on the gain that isn’t federally excluded.
What is the maximum exclusion?
Per shareholder, per company, the greater of $10 million or 10x the shareholder’s aggregate adjusted basis in the stock. Stacking across spouses, children, and trusts can multiply the household cap.
Is QSBS available to angel investors and employees?
Yes, if they acquired the stock at original issuance from the company (or through certain exercised options), held for more than five years, and the other tests are met. Employee options exercised at a strike price tend to qualify; secondary market purchases generally do not.
What happens if I sell before five years?
No QSBS exclusion on that gain — unless you do a § 1045 rollover into replacement QSBS within 60 days and meet the other requirements. Plan this before signing a term sheet.
Does a SAFE or convertible note qualify for QSBS?
The SAFE or note itself doesn’t qualify. The QSBS clock typically starts when the SAFE or note converts into actual C-corp stock. This is why timing conversion strategically — and documenting it — matters.
Will the 2025 amendments change my plan?
The 2025 amendments clarified aggregation rules for related entities and expanded qualifying trades/businesses in certain technology categories. If you formed your company or reorganized it in 2024 or later, have your counsel revisit classification.
How do I prove QSBS eligibility at sale?
Contemporaneous records win audits. Keep stock issuance records, board resolutions, the company’s gross-assets history, and any shareholder-level basis documentation. Request a QSBS statement from the company as part of the sale process.
Next step. If you think your company might qualify for QSBS — or if you’re considering moving from an LLC to a C-corp — reach out to john@montague.law for a short eligibility assessment. The earlier you start, the more planning options you have.
