Short answer
Qualified Small Business Stock (QSBS) under Section 1202 can exclude up to $15 million of gain, or ten times your basis if larger, from federal tax when you sell. But it only applies to stock in a C corporation that was held long enough and whose business is not an excluded field. Accounting, consulting, financial and insurance brokerage, health, law, and engineering are excluded. Trades like HVAC and plumbing, IT managed services, and staffing can often qualify, but it is fact-specific. If your business is an S corporation or an LLC, you do not hold QSBS at all unless you converted to a C corporation years before the sale. Because the rules turn on entity choice made long before a deal, QSBS is something to check early, with a CPA, not at closing.
Key facts
- Maximum exclusion (2026)
- The greater of $15 million per issuer or 10 times your basis. The $15 million cap indexes for inflation starting 2027.
- Holding period (stock issued after July 4, 2025)
- 50% excluded at 3 years, 75% at 4 years, 100% at 5 years. Older stock uses the prior 5-year, 100%, $10 million rule.
- The 28% trap
- Gain that is not excluded in the 3-year and 4-year tiers is taxed at 28%, not 20%.
- Entity requirement
- The company must be a domestic C corporation at issuance and for substantially all your holding period. S corporations and LLCs do not hold QSBS.
- Size limit
- The company's gross assets must have been $75 million or less (was $50 million) when the stock was issued.
- Excluded fields
- Health, law, engineering, architecture, accounting, actuarial, performing arts, athletics, consulting, financial services, and brokerage. These cannot be QSBS.
What QSBS is, in one paragraph
Qualified Small Business Stock is a rule in the tax code, Section 1202, that lets you exclude a large amount of gain from federal income tax when you sell stock in certain small companies. In 2026 the exclusion reaches the greater of $15 million or ten times what you paid for the stock, and if you have held the stock long enough, the excluded gain is taxed at zero. For the owners it fits, nothing else in the tax code comes close. The catch is that it fits a specific shape of business, and most small companies are not that shape without planning done years earlier.
Before anything else, QSBS asks two yes-or-no questions. Was the business a C corporation when the stock was issued, and for most of the time you held it? And is the business something other than an excluded service field? If either answer is no, there is no QSBS, and the rest of the details do not matter. Check these two first.
How much can it exclude, and for how long must you hold?
The amount is the greater of $15 million per company or ten times your basis in the stock. Basis for a founder is usually small, so the $15 million figure is what most owners use. The $15 million cap replaced the old $10 million cap for stock issued after July 4, 2025, and it starts adjusting for inflation in 2027.
The holding period changed too. For stock issued after July 4, 2025, you get a partial exclusion sooner:
| Held for | Gain excluded | Rate on the taxable part |
|---|---|---|
| 3 years | 50% | 28% plus 3.8% on the half that is still taxed |
| 4 years | 75% | 28% plus 3.8% on the quarter that is still taxed |
| 5 years or more | 100% | Nothing left to tax |
Two things to notice. The part of your gain that is not excluded in the three-year and four-year tiers is taxed at 28 percent, higher than the usual 20 percent capital gains rate, plus the 3.8 percent net investment income tax. And only holding to the full five years gets you to zero. If you are close to a five-year mark, the difference between selling at four years and eleven months versus five years and one day can be worth more than anything else in the deal. Stock issued on or before July 4, 2025 uses the older rule: five years, 100 percent, and the $10 million cap.
Which businesses can qualify, and which cannot
Section 1202(e)(3) says a qualified business cannot be in health, law, engineering, architecture, accounting, actuarial science, performing arts, athletics, consulting, financial services, or brokerage. It also excludes any business whose principal asset is the reputation or skill of one or more employees. The test is not just the label on your business card. The IRS looks at what the business actually does, so a company in a gray area can go either way. Here is how the eight kinds of business this site covers tend to fall.
| Business | Can it be QSBS? | Why |
|---|---|---|
| HVAC, plumbing, electrical | Often yes, if a C corp | Trades are not excluded fields. Fact-specific, and no IRS ruling names them, but an operating trades company generally qualifies. |
| IT managed services | Often yes, if a C corp | Recurring managed services are not a named excluded field. Heavy project-advisory work raises a consulting concern. |
| Staffing | Can qualify | Labor-provision businesses without unique individual expertise have qualified in IRS guidance. |
| Accounting and CPA firms | No | Accounting is a named excluded field. |
| Consulting firms | No | Consulting is a named excluded field. |
| Insurance agencies | Uncertain | Close to financial services and brokerage, though the IRS once approved an insurance agent privately. Get a written opinion. |
| Marketing agencies | Usually no or uncertain | Reputation-and-skill and consulting concerns. Fact-specific and generally the harder case. |
If your industry is in the "no" rows, do not spend energy on QSBS. Your tax planning runs through personal goodwill, the deal structure, installment treatment, and the after-sale plan, all of which matter regardless of QSBS.
The entity gate that stops most owners
QSBS is stock in a C corporation. If your business is an S corporation or an LLC, which describes most owner-run businesses under $20 million, you do not hold QSBS, full stop. This surprises people, because S corporations issue stock too. The rule is specific to C corporations.
Some owners convert to a C corporation to start the QSBS clock. It can work, but three things temper it. Only the appreciation after the conversion qualifies, so value built up as an S corporation or LLC does not get the exclusion. The five-year clock starts at conversion, so you need real runway before a sale. And a C corporation has its own downsides while you keep operating, including a second layer of tax on distributions. Converting on the eve of a sale does almost nothing. Converting five or more years before a planned sale can be one of the highest-value moves an owner ever makes. This is the reason to have the conversation early.
California does not conform to Section 1202. A California resident who excludes $10 million of gain federally still owes California tax on the full gain, up to 13.3 percent. QSBS is a federal break, not a state one, and a few states besides California decline to follow it. Model the state bill separately.
A worked illustration
Suppose you built an HVAC company as a C corporation, converted or incorporated more than five years ago, with a small basis, and you sell your stock for a $10 million gain that is within the $15 million cap. If the business meets the tests, the entire $10 million can be excluded from federal tax. At the 20 percent capital gains rate plus the 3.8 percent net investment income tax, that is roughly $2.38 million of federal tax that does not get paid. A California resident would still owe California tax because the state does not conform. This is an illustration with its assumptions stated, not a promise; whether any business qualifies is a question only your CPA can answer in writing.
When QSBS does not help you
Be honest with yourself early, because chasing QSBS where it does not apply wastes time you could spend on planning that does. It does not help if your business is an S corporation or LLC and always has been. It does not help if you are in accounting, consulting, or another excluded field. It does not help if you are selling this year and were never a C corporation, because the clock cannot be created retroactively. And it is only a federal break, so in California and a few other states you owe state tax on the gain either way.
What to do next
Check the two gates today
Ask your CPA two questions: is the business a C corporation, and for how long, and is our field excluded under 1202(e)(3). Two answers tell you whether QSBS is even on the table.
If the answer is promising, get it in writing
QSBS eligibility is fact-specific and the stakes are large, so it deserves a written opinion and often a qualified appraisal at the time of any conversion. This is not a do-it-yourself item.
If you have runway, weigh a C-corp conversion
Owners five or more years from a sale should at least model whether converting now starts a clock worth millions later. Owners near a sale should not.
Either way, plan the rest of the deal
QSBS is one lever. The allocation, structure, and rollover decide the rest of the tax, and the after-sale plan decides what the money does for you. Those matter whether or not QSBS is available.
Questions people ask
Does my HVAC or plumbing business qualify for QSBS?
It can, if it is a C corporation and has been for long enough, because the trades are not on the list of excluded fields. There is no IRS ruling that names HVAC or plumbing directly, so the answer is fact-specific and depends on the business being an operating company rather than one built around one person's reputation. Most trades businesses are S corporations or LLCs, and those do not hold QSBS, so the real question is usually whether a C-corp conversion was done years ago.
Does an accounting firm or consulting firm qualify?
No. Accounting and consulting are named excluded fields under Section 1202(e)(3), so stock in an accounting or consulting business is not QSBS no matter how it is taxed. For those sellers the tax planning runs through personal goodwill, the deal structure, installment treatment, and the after-sale plan instead.
What about an insurance agency?
It is uncertain and fact-specific. Insurance is close to the excluded fields of financial services and brokerage, but the IRS once ruled privately that an insurance agent was a qualified business. Do not count on QSBS for an agency without a written opinion from your CPA, and remember the C-corp requirement applies here too.
I run an LLC. Can I still get QSBS?
Not on the sale as an LLC. QSBS is only stock in a C corporation. Some owners convert an LLC to a C corporation to start the QSBS clock, but only the growth after the conversion qualifies, the five-year clock starts over, and the move has its own costs. This only makes sense with years of runway before a sale, not on the eve of one.
How much can QSBS actually save me?
At the top, all of it. If you hold qualifying stock for five years and your gain is within the greater of $15 million or ten times your basis, the excluded gain pays zero federal tax. On a $10 million qualifying gain that is roughly $2.38 million of federal tax avoided. State treatment varies, and California does not conform, so a California seller still owes state tax on the gain.
Why is there a 28 percent rate in the 3 and 4 year tiers?
Section 1202 taxes the portion of gain that is not excluded at a special 28 percent rate rather than the usual 20 percent. In the 50 percent and 75 percent tiers, part of your gain is still taxable, and that part is taxed at 28 percent plus the 3.8 percent net investment income tax. Holding to the full five years removes this, which is why the five-year mark matters.
Does the rollover equity I take get QSBS?
Possibly, and this is worth asking about. If the private equity buyer's holding company is a C corporation and meets the size and business tests when your rollover stock is issued, that stock can start its own QSBS clock. Whether it qualifies depends on the holding company's structure and business, which is not something you control, so get it in writing rather than assuming.