{"schema_version":"1.0","generated_by":"COLE — Citation Operations & Legal Engine","product_id":"qsbs-exit-auditor","title":"QSBS Exit Risk Engine — Multi-Million Dollar Exclusion or Full Tax","site":"https://taxchecknow.com/us/check/qsbs-exit-auditor","authority":"IRS","authority_url":"https://www.irs.gov","jurisdiction":"United States","language":"en-US","currency":"USD","last_verified":"April 2026","legislation":"Internal Revenue Code §1202 — Partial exclusion for gain from certain small business stock · IRC §1202(c) definition of qualified small business stock · IRC §1202(d)(1) gross assets test ($50M limit) · IRC §1202(e) active business / excluded business test · IRC §1202(e)(3) list of excluded businesses (professional services, finance, hospitality, farming) · Pre-July 4, 2025: 5-year hold, 100% exclusion, cap greater of $10M or 10× basis · Post-July 4, 2025 (One Big Beautiful Bill Act): partial exclusion 50% at 3 years / 75% at 4 years / 100% at 5 years, cap greater of $15M or 10× basis · Related: IRC §1045 rollover of QSBS gain into new QSBS within 60 days · Combined federal rate on taxable gain: 20% long-term capital gains + 3.8% NIIT = 23.8%","legal_anchor":"IRC §1202 (Qualified Small Business Stock) — pre-amendment and OBBBA 2025 regimes","deadline":{"iso_date":"2026-04-15T23:59:59.000-04:00","display":"April 15, 2026","description":"April 15, 2026 — federal tax filing deadline. QSBS exclusion must be properly claimed on Form 1040 Schedule D with appropriate documentation. Late or incorrect claims create audit exposure.","urgency_label":"FILING + EXIT PLANNING"},"key_facts":{"legal_anchor":"IRC §1202","pre_july_4_2025_exclusion":"100% at 5 years (all-or-nothing)","pre_2025_cap":"Greater of $10M or 10× basis","post_july_4_2025_exclusion_obbba":"50% at 3yr, 75% at 4yr, 100% at 5yr","post_2025_cap":"Greater of $15M or 10× basis","entity_requirement":"Domestic C-corporation at issuance","acquisition_requirement":"Original issuance — secondary market fails","gross_assets_threshold":"$50M at issuance and immediately after","excluded_businesses":"Professional services, finance, hospitality, farming","combined_federal_rate_on_non_qsbs_gain":"23.8% (20% + 3.8% NIIT)","related_deferral_provision":"§1045 rollover (60 days into new QSBS)"},"formula":"QSBS qualification test: (Domestic C-corp at issuance) AND (Original issuance — not secondary) AND (Gross assets under $50M at issuance) AND (Qualified active business — not excluded) AND (Held by original recipient). Exclusion percentage: Pre-July 2025 — 100% at 5 years, 0% if under 5 years. Post-July 2025 — 50% at 3 years, 75% at 4 years, 100% at 5 years. Cap: Pre-2025 greater of $10M or 10× basis. Post-2025 greater of $15M or 10× basis. Federal tax on non-excluded gain: 20% long-term capital gains + 3.8% NIIT = 23.8% combined.","thresholds":[{"label":"All 7 gates pass + 5+ years held + pre-July 2025 issuance","value":1,"status":"clear"},{"label":"All 7 gates pass + 5+ years held + post-July 2025 issuance ($15M cap)","value":2,"status":"clear"},{"label":"All gates pass + 3-5 years + post-2025 (partial 50% or 75% exclusion)","value":3,"status":"approaching"},{"label":"One gate uncertain — verify before exit","value":4,"status":"trap"},{"label":"Structural gate fails (non-C-corp, secondary, excluded business, etc)","value":5,"status":"deep_trap"}],"common_ai_errors":[{"error_id":1,"ai_says":"ChatGPT says: My startup stock qualifies for QSBS automatically","correct":"Reality: QSBS requires the company to have been a C-CORPORATION at the time of issuance, with gross assets under $50 million, operating in a QUALIFIED BUSINESS. Many startup founders hold a MIX of qualifying and non-qualifying shares — equity issued when the company was an LLC or S-corp does not qualify even if later converted. Qualification must be confirmed share-by-share, not assumed."},{"error_id":2,"ai_says":"ChatGPT says: I bought shares in a promising startup so they qualify","correct":"Reality: QSBS requires ORIGINAL ISSUANCE — shares acquired directly from the company in exchange for money, property, or services. Shares purchased from another shareholder on the secondary market, through a broker, or on a platform like Forge or EquityZen do NOT qualify. The original holder may have had qualifying shares. The secondary buyer does not."},{"error_id":3,"ai_says":"ChatGPT says: QSBS gives you a partial exclusion if you don't fully qualify","correct":"Reality: Structural failures (wrong entity, secondary purchase, gross assets exceeded, excluded business) result in ZERO exclusion — not a reduced exclusion. The only partial exclusion available is the TIMING-based partial under post-July 4, 2025 rules: 50% at 3 years, 75% at 4 years. These are timing partials — not qualification partials."},{"error_id":4,"ai_says":"ChatGPT says: My company is in tech so it automatically qualifies","correct":"Reality: The active business requirement excludes certain SERVICE-BASED businesses regardless of how they describe themselves. Professional services (law, medicine, finance, consulting), financial services, hospitality, and farming are excluded under IRC §1202(e)(3). A technology company that primarily provides CONSULTING services may not qualify. The test is the NATURE of the business — not the industry label."}],"faq":[{"id":1,"question":"What is Section 1202 QSBS?","answer":"Section 1202 of the Internal Revenue Code provides a federal capital gains tax exclusion on the sale of Qualified Small Business Stock. For pre-July 4, 2025 stock held 5+ years: 100% exclusion up to $10M or 10× basis. For post-July 4, 2025 stock: partial exclusion at 3 years (50%) and 4 years (75%), with 100% at 5 years and a higher $15M cap under OBBBA."},{"id":2,"question":"What are the qualification requirements?","answer":"Five structural tests and one timing test. Structural (all must pass): (1) domestic C-corporation at issuance, (2) original issuance — not secondary market, (3) gross assets under $50M at issuance, (4) qualified active business — not excluded per §1202(e)(3), (5) held by original recipient. Timing: minimum 5 years for full exclusion (or 3/4 years for partial post-2025). All structural gates are binary — any failure eliminates the entire exclusion."},{"id":3,"question":"What businesses are excluded from QSBS?","answer":"IRC §1202(e)(3) excludes: professional services (law, health, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services), financial services broadly, any business where the principal asset is the reputation or skill of employees, hotels, restaurants, farming, extraction of minerals/oil/gas, and banking/insurance/investing. A business in an excluded category fails regardless of other qualifications."},{"id":4,"question":"What if my stock qualifies for partial exclusion under post-2025 rules?","answer":"Under the post-OBBBA rules (stock acquired on or after July 4, 2025), partial exclusions apply at 3 years (50%) and 4 years (75%). The 50% and 75% values are applied to the lesser of the gain or the cap ($15M or 10× basis). Example: $8M gain, post-2025 stock, 4 years held = $6M excluded (75%), $2M taxable × 23.8% = $476k tax. Waiting to 5 years = $0 tax."},{"id":5,"question":"What is the §1045 rollover?","answer":"IRC §1045 allows deferral of QSBS gain by rolling it into new QSBS within 60 days of sale, provided the taxpayer held the original QSBS for more than 6 months. Useful when: (a) you sell QSBS early (before 5 years) and want to preserve QSBS potential, (b) your gain exceeds the cap and you want to defer the excess. The rollover defers tax — does not eliminate it — but preserves future QSBS exclusion eligibility if the new stock qualifies and is held 5+ years."},{"id":6,"question":"Does my state conform to federal QSBS?","answer":"Most states conform to federal §1202, but several do not. California specifically does NOT exclude QSBS gain from state tax — expect California tax on the full gain regardless of federal exclusion. Pennsylvania, New Jersey, Alabama, and Mississippi have partial conformity issues. Check your state's conformity to §1202 before assuming the federal exclusion applies at state level. California exit planning often involves residency planning to break California tax residency before exit."},{"id":7,"question":"Can I stack QSBS caps across family members?","answer":"Yes. Each shareholder has their own §1202 cap. A founder who gifts QSBS to a spouse or children before exit creates additional caps — each recipient can use their own $10M or $15M cap. Restrictions: gift must be a bona fide transfer (not a sham), holding period tacks for §1202 purposes (recipient inherits original holder's holding period), and gift tax may apply (but marital deduction is unlimited between spouses). Requires careful planning — engage a tax attorney."},{"id":8,"question":"What documentation do I need for QSBS?","answer":"Key documents: (1) §1202 attestation letter from the issuing company confirming qualification at issuance, (2) cap table entries showing your specific shares and issuance date, (3) company formation documents and any entity conversion records (LLC to C-corp), (4) annual balance sheets around issuance date showing gross assets, (5) business activity documentation for qualified business test, (6) exercise records for options (exercise date = QSBS start date for option-acquired shares), (7) Schedule D and Form 8949 at exit showing exclusion claimed."}],"sources":[{"title":"IRS — Partial exclusion for gain from certain small business stock (Section 1202)","url":"https://www.irs.gov/businesses/small-businesses-self-employed/section-1202-qualified-small-business-stock"},{"title":"IRC Section 1202","url":"https://www.law.cornell.edu/uscode/text/26/1202"},{"title":"IRC Section 1045 (rollover of QSBS gain)","url":"https://www.law.cornell.edu/uscode/text/26/1045"},{"title":"IRS Form 8949 (Sales and Other Dispositions of Capital Assets)","url":"https://www.irs.gov/forms-pubs/about-form-8949"},{"title":"Machine-readable JSON rules","url":"/api/rules/qsbs-exit-auditor"}],"products":{"tier1":{"name":"Your QSBS Audit Pack","price":67,"currency":"USD","description":"Gate-by-gate qualification analysis + regime comparison + exit tax math","url":"https://taxchecknow.com/us/check/qsbs-exit-auditor/success/assess"},"tier2":{"name":"Your QSBS Exit Strategy Pack","price":147,"currency":"USD","description":"Full exit strategy: timing + §1045 + basis + multi-shareholder stacking","url":"https://taxchecknow.com/us/check/qsbs-exit-auditor/success/plan"}},"monitor_urls":["https://www.irs.gov/businesses/small-businesses-self-employed/section-1202-qualified-small-business-stock"],"canonical":"https://taxchecknow.com/us/check/qsbs-exit-auditor","api_endpoint":"/api/rules/qsbs-exit-auditor","generated_at":"2026-04-23T04:05:33.039Z"}