Updated July 28, 2026. Quick answer: Five tests, all of which must hold: the issuer was a domestic C corporation, it met the gross-assets ceiling at issuance, it uses at least 80% of assets in a qualified active business, you acquired the stock at original issuance, and no disqualifying redemptions occurred around your purchase.
The tests
| Test | What it means |
|---|---|
| C corporation | Domestic C corp at issuance and substantially throughout your holding. LLCs and S corps do not qualify while in that form. |
| Gross assets at issuance | $75,000,000 for stock issued after 4 July 2025; $50,000,000 for earlier stock. Measured at issuance — later growth does not disqualify. |
| Active business | At least 80% of assets used in a qualified trade or business. Several service fields are excluded by statute. |
| Original issuance | Acquired directly from the company, not bought from another shareholder. |
| Redemptions | Certain company buybacks near your purchase can taint the stock entirely. |
The original-issuance requirement is the one that most often surprises people: secondary-market purchases generally do not qualify, however early you bought.
Get it confirmed in writing
Whether a company is a qualified small business is a fact about the company, not about you, and it is not something you can determine from your share certificate. Many startups will provide a QSBS attestation on request. Ask for it while the people who know are still there — reconstructing this years later, after an acquisition, is far harder.
Sources
IRC §1202(a)(5) (tiered exclusion); IRC §1202(b)(1) (10x basis alternative); new IRC §1202(b)(4) ($15,000,000 cap and inflation indexing from 2027); One Big Beautiful Bill Act, enacted 4 July 2025. Cross-checked against professional analyses from The Tax Adviser (AICPA), Baker Tilly, Holland & Knight, K&L Gates, Mintz, Davis Wright Tremaine and Grant Thornton, July–November 2025.
This states what the cited authority says. It is not tax advice, and Section 1202 qualification turns on facts about the issuing company that no page can verify for you.