The Qualified Small Business Stock (QSBS) tax break allows founders to exclude up to $15M in capital gains from the sale of their businesses. The qualifications for this tax break include…
1 – The business must be a domestic C Corporation. S Corporations, partnerships, and traditional LLCs do not qualify. An LLC that has elected C-Corp Status or that converts to a C Corp can claim QSBS going forward.
2 – At least 80% of the corporation’s assets by value must be actively used to run the business.
3 – No more than 50% of the company’s assets can consist of working capital, such as cash held for future business needs or research.
4 – For stock issued on or before July 4, 2025, the aggregate gross assets cannot exceed $50 million. If the stock was issued after July 4, 2025, the gross asset limit is raised to $75 million.
The following industries are specifically excluded from claiming this tax break.
1 – Professional Services: Health, law, engineering, architecture, accounting, actuarial science, consulting, or athletics.
2 – Financial Services: Banking, insurance, financing, leasing, investing, or brokerage firms.
3 – Hospitality: Hotels, motels, restaurants, or similar businesses.
4 – Natural Resources: Farming, forestry, mining, or mineral extraction.
5 – Reputation/Skill: Any trade where the principal asset is the reputation or skill of its employees.
QSBS lets investors and founders avoid as much as a 23.8% tax on the sale of shares. Created in 1993 and since expanded, it enjoys bipartisan support because it links to the small businesses, entrepreneurship, and early-stage investment that lawmakers want to promote.
The problem that the IRS has with this law is known as “stacking”. This is the process of giving portions of the company away to other individuals or trusts so that their portion of the company will also qualify for the tax break.
The law explicitly allows investors to transfer shares to others, enabling each taxpayer to qualify for the $15M exclusion. As such, stacking has become a core part of founders’ early plans.
The basic idea requires giving away shares to trusts when they aren’t worth much. That minimizes the gift-tax hit for the founder and ensures that each piece of the stack can get its own $15 million exclusion when the company is worth more.
The law also constrains the administration’s ability to combat stacking. Imagine a founder has three children and sets up trusts for each of them, turning the $15 million maximum exclusion into $60 million.
The Treasury Department and the IRS never published comprehensive regulations on QSBS and courts have provided minimal guidance. That lack of rules and detailed taxpayer reporting requirements left the break without effective guardrails.
But don’t kid yourselves, my Brothers and Sisters. The IRS isn’t happy.
“Let me just warn you,” said Kenneth Kies, the Treasury’s top tax-policy official in a speech last month. “We don’t like stacking, OK?”
Kies also said that the administration will likely propose rules aimed at limiting QSBS stacking. The new rules could target what the government sees as aggressive planning. The most aggressive versions effectively set up multiple trusts for the same taxpayer.
The QSBS break is estimated to reduce federal revenue by $4.9 billion this year, according to the Congressional Joint Committee on Taxation. From 2012 through 2022, taxpayers claimed $140 billion in QSBS exclusions, according to a 2025 Treasury Department study.
Let me leave you with this…
I’m writing this as a warning because I’m seeing more of it. Most of the issue comes down to intent.
In tax law, intent is crucial because it separates innocent mistakes from criminal fraud. It dictates whether a taxpayer faces simple civil penalties, interest charges, or severe federal prison time for “willfully” violating tax obligations.
Most of the time, the issue will come down to timing and other factors.
If you started a business 20 years ago, and initially set up the trusts with the stock for your children, operated the business as a C Corp for all those years, and then sold it for $60M, I doubt that our friends at the Service would have much to say about it. How could they?
Where’s the intent?
On the other hand, let’s say that you’ve had a business as an S Corp for twenty years, switched it over to a C Corp 5 years ago, and then put the business up for sale. You then get an offer of $60M and stack three trusts for your kids, what do you think our friends at the Service would say?
How about, “No. Fahgetabadit. Not in this lifetime.” A blind man could see this entrepreneur’s intent from outer space.
Take a moment and realize that tax agencies pay attention when businesses are sold. This is a big money maker for them.
They’re in the business of collecting money so that our elected officials can find new and creative ways to waste it.
If some enterprising Tax Guru tells you how you can save an infinite amount of money in capital gains tax when you sell your business, take a moment and smell a rat. Breathing free air has a cost.
As always, if you’re having difficulties with your accounting and tax work, contact us today. We’d love to help.
We’re all going to get through this. Let’s get through it together…
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, Accounting and Tax Work, Tax Planning, or Tax Representation, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
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