Section 1202: Qualified Small Business Stock (QSBS)

Section 1202 of the Internal Revenue Code, commonly referred to as Qualified Small Business Stock (QSBS), has emerged as a critical tax planning tool for founders, investors and deal professionals. With the recent passage of the One Big Beautiful Bill Act, which expands the tax benefits available under QSBS, the landscape is shifting rapidly and demands close attention.

Section 1202 is more than a tax break – it's a strategic tool. For those structuring a transaction, planning an exit, advising clients or wanting to learn more, Holland & Knight's experienced team can help you stay ahead.

What Qualifies as Section 1202 Stock?

QSBS must meet several criteria under the Internal Revenue Code to be eligible for tax exclusion benefits.

• Original Issuance: You must acquire the stock directly from the company at its original issuance – typically in exchange for cash, property (excluding stock) or services
• Qualified Corporation: The issuing company must be a domestic C corporation and not operate in excluded industries such as banking, farming, hospitality or professional services
• Gross Assets Test: At the time of issuance, the company must have less than $75 million in gross assets (or $50 million for stock issued before July 4, 2025)
• Active Business Requirement: At least 80 percent of the company's assets must be used in the active conduct of one or more qualified trades or businesses
• Holding Period: You must hold the stock for more than five years to claim the exclusion on capital gains
• Eligible Shareholders: Only non-corporate taxpayers (individuals, trusts, estates) can claim the QSBS exclusion
• Permitted Transfers: Certain tax-free transfers (e.g., gifts, inheritance, partnership distributions) may preserve QSBS status but must meet specific conditions

Reliable Insights from Holland & Knight

Holland & Knight's tax and corporate attorneys remain up to date all things Section 1202, publishing thought leadership and hosting on events to help clients navigate the evolving QSBS terrain with clarity and confidence.