Exclusion of Gain on Qualified Small Business (QSB) Stock

Section 1202 allows you to exclude a portion of the eligible gain on the sale or exchange of QSB stock. The section 1202 exclusion applies only to QSB stock held for more than 5 years. If you acquired the QSB stock on or before February 17, 2009, you can exclude up to 50% of the qualified gain. However, you can exclude up to 60% of the qualified gain on certain empowerment zone business stock for gain attributable to periods on or before December 31, 2018. The 60% exclusion doesn’t apply to gain attributable to periods after December 31, 2018. See Empowerment Zone Business Stock , later.

If you acquired the QSB stock after February 17, 2009, and before September 28, 2010, you can exclude up to 75% of the qualified gain.

If you acquired the QSB stock after September 27, 2010, you can exclude up to 100% of the qualified gain.

To be QSB stock, the stock must meet all of the following tests.

It must be stock in a C corporation (that is, not S corporation stock).

It must have been originally issued after August 10, 1993.

As of the date the stock was issued, the corporation was a qualified small business. A qualified small business is a domestic C corporation with total gross assets of $75 million ($50 million if the stock was issued on or before July 4, 2025) or less (a) at all times after August 9, 1993, and before the stock was issued; and (b) immediately after the stock was issued. Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation.

You must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property (other than stock) or as pay for services (other than as an underwriter) to the corporation. In certain cases, you may meet this test if you acquired the stock from another person who met the test (such as by gift or inheritance) or through a conversion or exchange of QSB stock you held.

During substantially all the time you held the stock: The corporation was a C corporation; At least 80% of the value of the corporation’s assets were used in the active conduct of one or more qualified businesses (defined next); and The corporation wasn’t a foreign corporation, DISC, former DISC, regulated investment company, real estate investment trust, REMIC, FASIT, or cooperative, or a corporation that has made (or that has a subsidiary that has made) a section 936 election.

SSBIC. A specialized small business investment company (SSBIC) is treated as having met test 5b.

Definition of qualified business.

A qualified business is any business that isn’t one of the following.

A business involving services performed in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.

A business whose principal asset is the reputation or skill of one or more employees.

A banking, insurance, financing, leasing, investing, or similar business.

A farming business (including the raising or harvesting of trees).

A business involving the production of products for which percentage depletion can be claimed.

A business of operating a hotel, motel, restaurant, or similar business.

For more details about limits and additional requirements that may apply, see Pub. 550 or section 1202.

Acquisition date of stock acquired after February 17, 2009.

When you are determining whether your exclusion is limited to 50%, 75%, or 100% of the gain from QSB stock, your acquisition date is considered to be the first day you held the stock (determined after applying the holding period rules in section 1223).