Does Your Company Qualify for QSBS?

1 · Why this matters

Section 1202 of the tax code lets an individual exclude capital gain on the sale of qualified small business stock — QSBS — from federal income tax. For stock issued after July 4, 2025, the amount you can exclude is the greater of $15 million or ten times what you paid for the stock, per company. For stock issued earlier, it's $10 million or ten times your cost. And the cap is per person, which is what makes gifting and trust planning so powerful.

That is a large benefit, so the rules are specific. Most of the disappointment around QSBS doesn't come from the planning — it comes from discovering, late, that the stock never qualified in the first place. This paper is the front-end check: before anyone talks about multiplying the exclusion, the stock has to earn it.

2 · The six things that have to be true

Strip away the jargon and QSBS comes down to six conditions. Miss any one and the stock doesn't qualify — no matter how good the rest of the plan looks.

One more, easy to overlook: you can't be a corporation yourself. The exclusion belongs to individuals, and to trusts and estates — which is the door that gifting and stacking walk through.

3 · What kinds of companies qualify

The good news for most founders: if you make something, build something, or sell a product, you are probably in qualifying territory. The exclusions are aimed at a list of specific industries (Section 4); everything outside that list is generally fair game, as long as the company runs a real, active business.

Businesses that typically qualify:

• Manufacturers — including food and beverage manufacturers, consumer products, industrial equipment, medical devices, hardware.
• Technology and software — SaaS, platforms, developer tools, most product-driven tech companies.
• Biotech and life-sciences product companies — developing drugs, devices, or diagnostics (as distinct from delivering medical care).
• Retail and consumer brands that sell their own products, and many wholesale and distribution businesses.
• Most companies whose value comes from products, technology, or assets — not from the personal reputation or skill of a few key people.

4 · What doesn't qualify — and why

The tax code names the businesses that are excluded. The theme is consistent: Congress wanted to reward investment in companies that build and scale, not in personal-services or financial businesses. The carve-outs are:

• Personal and professional services — health, law, accounting, engineering, architecture, actuarial science, consulting, performing arts, and athletics. (Engineering and architecture surprise people — they're explicitly out.)
• Any business whose principal asset is the reputation or skill of its employees — a catch-all that sweeps in many boutique, expertise-driven firms even if they're not named above.
• Finance — banking, insurance, financing, leasing, investing, and brokerage.
• Farming — including raising or harvesting trees.
• Extraction — mining, oil, and gas (anything claiming depletion deductions).
• Hospitality — operating a hotel, motel, restaurant, or similar business.

5 · "Does a food manufacturer qualify?" and other close calls

Yes — a food manufacturer generally qualifies. Making and selling a food or beverage product is manufacturing. It isn't on any excluded list, and its value comes from the product, the brand, and the plant — not from the personal skill of a few employees. A company that produces packaged food and sells it to retailers or distributors is squarely the kind of business §1202 was written to encourage.

The contrast is the lesson. A restaurant that cooks and serves food is hospitality — excluded. So the same word — "food" — lands on opposite sides of the line depending on what the business actually does: manufacture a product, or operate a hospitality venue.

Three more traps worth knowing before you assume the stock qualifies:

• The size test is a snapshot. It's measured when the stock was issued — and at every later issuance. A company that crossed the asset threshold before your shares were issued can taint that batch.
• SAFEs and convertible notes aren't stock yet. The QSBS clock and the qualification tests generally run from when they convert into actual stock, not when you wrote the check.
• How the company became a C corp matters. Stock that came out of converting an LLC or S corporation has to be analyzed carefully — a recent court denied the exclusion on exactly that point.

6 · If it qualifies, what's next

Qualification is the front door. Once the stock clears these six tests, the planning question opens up: the exclusion is per taxpayer, so gifting shares to family members and non-grantor trusts before a sale can multiply it. That's a separate body of work — with its own timing rules and its own audit exposure.

If you're past qualification and into planning, three companion resources pick up where this one ends: how gifting actually works, a checklist of what the IRS examines, and the defensibility framework for multi-trust stacks.