Back
Frequently Asked Questions

What are the main QSBS requirements?

In order for shares to be eligible for QSBS tax incentives, both the issuing corporation and the holder must satisfy numerous requirements.  

Here is a summary of some of the key requirements: 

  • The issuing corporation must be a United States C corporation.  Stock issued by non-US corporations are not eligible, nor are stock issued by S corporations or membership interests issued by LLCs which are classified for tax purposes as partnerships (LLCs which are classified for tax purposes as C corporations may qualify).  For businesses which were originally operated as S corporations or LLCs, there may be opportunities to convert such businesses to C corporation status in a way which creates (and potentially enhances) QSBS availability for current and/or future owners of the business.  
  • During substantially all of the holder’s holding period of the shares, at least 80% of the corporation’s assets must be used in the active conduct of a qualified trade or business.  Various types of service businesses are not qualified, such as law, accounting, healthcare, financial services and brokerage services. Businesses involving fintech, crypto, life sciences or other similar businesses can potentially qualify, but can often raise difficult factual questions.  Banking, insurance, financing, leasing, investing, hotels/motels and restaurants are also not qualified businesses.  
  • The corporation must have $50,000,000 or less of gross assets at all times before and immediately after the issuance of the shares. Gross assets are generally measured by the corporation’s adjusted tax basis in those assets, rather than fair market value (except for property contributed to the corporation). This is an important feature for a fast-growing early-stage corporation whose fair market value may very quickly increase above $50 million, whereas the tax basis in its assets may still remain below $50 million for a more extended period of time.  
  • The shares must have been purchased by the holder directly from the corporation.  Shares acquired by way of secondary purchase, for example, would not qualify (see Secondary Sale).  
  • The shares must be issued for cash, services or other property (generally excluding stock of another corporation).
  • Generally a holder of QSBS may only take advantage of the benefits of the QSBS tax provisions if they hold the shares for more than five years. Certain exceptions to this general rule can apply. Note also that the holding period in QSBS will be suspended if, prior to completing that holding period, the holder has an “offsetting short position” with respect to its QSBS, including if the holder makes a short sale of its QSBS or acquires an option to sell its QSBS.

In addition, shares in a corporation may lose QSBS status if the corporation takes certain actions or holds certain assets.

Learn More: 

Related FAQs