Qualified Small Business Stock After the 2025 Law
The exclusion that can make a C corporation exit tax-free, the requirements at issuance and sale, and the larger limits for stock issued after July 4, 2025.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Qualified small business stock is stock in a domestic C corporation acquired at original issuance, in a company with gross assets under a statutory ceiling, that conducts an active business outside excluded fields. Held long enough, gain on sale is excluded up to a per-issuer cap; the 2025 law raised the limits and shortened the holding period for new stock.
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What are the requirements?
| Requirement | Rule |
|---|---|
| Entity | Domestic C corporation at issuance and during substantially all the holding period |
| Acquisition | Directly from the corporation for money, property, or services — not bought from another shareholder |
| Gross assets | At or below the threshold at all times before and immediately after issuance: $50 million for stock issued on or before July 4, 2025; $75 million for stock issued after that date (indexed for inflation after 2026) |
| Active business | At least 80 percent of assets (by value) used in the active conduct of a qualified trade or business |
| Excluded fields | Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking, insurance, financing, leasing, investing, farming, oil, gas, and mineral extraction, hotels, motels, and restaurants, and businesses where reputation or skill of employees is the principal asset |
| Redemptions | Certain redemptions around the issuance date disqualify the stock |
An LLC that converts to a C corporation can issue qualified stock from the conversion date, measured on asset value at that time.
How much gain is excluded?
For stock acquired after July 4, 2025: 50 percent after three years, 75 percent after four, and 100 percent after five, with a per-issuer cap of the greater of $15 million (indexed for inflation after 2026) or 10 times the basis in the stock. For stock acquired after September 27, 2010 and on or before July 4, 2025, the exclusion is 100 percent only after more than five years, capped at the greater of $10 million or 10 times basis. The excluded gain is not an alternative minimum tax preference for stock acquired after September 27, 2010 and is outside the net investment income tax. Under a 50 or 75 percent exclusion, the taxable part is taxed at a maximum 28 percent rate.
What if you sell before the holding period?
Gain from qualified stock held more than six months can be rolled into new qualified stock within 60 days under Section 1045, deferring tax and continuing the holding period.
How do owners multiply the cap?
The cap is per taxpayer per issuer. Gifts of stock to children, other family members, or non-grantor trusts carry the qualified status and holding period, giving each recipient their own cap; spouses filing jointly share one cap. The IRS scrutinizes arrangements that lack substance.
Does it change the entity choice?
For a company built to be sold — a technology or product business expecting a large exit — the exclusion can outweigh the C corporation's double tax, especially since retained earnings are taxed at 21 percent. For a professional service firm or a lifestyle business paying out profit each year, the S corporation usually still wins.
Frequently asked questions
Does Florida tax the gain?
Florida has no personal income tax. Some states, including California, do not follow the federal exclusion.
Can stock received for services qualify?
Yes, if issued directly by the corporation; it is treated as acquired at original issue.
Does converting an S corporation to a C corporation create qualified stock?
Not the existing shares. New stock issued after the conversion for money or property can qualify; existing shares were not issued by a C corporation.
Is there paperwork at issuance?
No filing, but keep the corporate records showing asset values and the active business test at issuance and through the holding period.
Official sources
Section 1202 of the Internal Revenue Code excludes from gross income: “the applicable percentage of any gain from the sale or exchange of qualified small business stock acquired after the applicable date and held for at least 3 years” — U.S. Code, 26 U.S. Code § 1202 - Partial exclusion for gain from certain small business stock, https://www.law.cornell.edu/uscode/text/26/1202
The IRS explains: “You may qualify for a tax-free rollover of capital gain from the sale of qualified small business stock held more than 6 months. This means that, if you buy certain replacement stock and make the choice described in this section, you postpone part or all of your gain.” — Internal Revenue Service, Publication 550 (2025), Investment Income and Expenses, https://www.irs.gov/publications/p550
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk tests whether a company's stock qualifies and documents the position at issuance, not at the exit. See pricing or book a free fit call.
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