Business owners spend years building value in their companies, but many spend far less time planning for the tax consequences of a future sale.
If you’re planning to sell your business someday, you may be able to significantly reduce the federal taxes owed on that sale through a little-known tax provision called the Qualified Small Business Stock (QSBS) exclusion under Section 1202 of the Internal Revenue Code. Depending on your circumstances, some or all of the gain from the sale may qualify for favorable tax treatment.
Recent changes under the One Big Beautiful Bill Act (OBBBA) have expanded certain QSBS benefits, creating new planning opportunities for founders, investors, and business owners.
What Is QSBS?
Qualified Small Business Stock, commonly known as QSBS, is stock issued by certain qualifying C corporations. Under Section 1202, eligible taxpayers may be able to exclude a portion, or even all, of the gain from the sale of that stock from federal income tax.
Although the rules are complex, the potential tax savings can be substantial, making QSBS an important planning consideration for business owners, founders, and investors.
Why Business Owners Should Care
Many entrepreneurs focus on growing their businesses and don’t begin thinking about an eventual sale until years later.
The challenge is that eligibility for QSBS often depends on decisions made long before a transaction is on the horizon, including how the business is structured and when the stock was issued. As a result, business owners should consider QSBS as part of a broader tax-planning strategy.
Key Changes Under the New Law
The OBBBA made several important changes to Section 1202 for stock issued after July 4, 2025. These changes include higher exclusion limits and new holding-period rules that may allow taxpayers to qualify for partial exclusions sooner.
Under the updated rules:
- Stock held for at least 3 years may qualify for a 50% exclusion.
- Stock held for at least 4 years may qualify for a 75% exclusion.
- Stock held for at least 5 years may qualify for a 100% exclusion.
These changes may create additional planning opportunities for business owners preparing for a future sale.
Does Your Business Qualify?
To qualify for QSBS treatment, several requirements must be met. Among other things:
- The company generally must be a domestic C corporation.
- At least 80% of its assets must be used in a qualified trade or business.
- Certain service and investment businesses may not qualify.
- The corporation must satisfy specific asset limitations.
Because qualification depends on a variety of factors, business owners should evaluate potential eligibility well before a transaction is contemplated.
Exit Planning Starts Earlier Than Most Owners Realize
One of the biggest misconceptions about selling a business is that tax planning begins when a buyer appears.
In reality, some of the most valuable planning opportunities must be considered years in advance.
Whether you’re evaluating entity structure, preparing for a future liquidity event, or developing a succession strategy, QSBS should be part of the conversation. It can also play an important role in broader wealth preservation and estate planning efforts, particularly for business owners looking to transfer wealth to future generations.
How Mandelbaum Barrett PC Can Help
Selling a business is often one of the most significant financial events in an owner’s life.
Our attorneys regularly advise business owners on tax planning, business succession, exit strategies, and wealth preservation. By evaluating opportunities early, business owners may be able to position themselves for a more tax-efficient transaction while preserving more of the value they’ve worked hard to create.
Looking Ahead
The Qualified Small Business Stock exclusion may be one of the most valuable tax-planning opportunities available to business owners today.
Understanding the rules before a sale occurs can help preserve options, maximize potential tax benefits, and support long-term financial goals. As business owners evaluate growth and exit strategies, Section 1202 should be part of the discussion.