Most founders assume their QSBS is fine. They issued stock early, the company stayed a C-corp, and they've been holding for five years. What's the problem?
The problem is that QSBS is a fact-intensive benefit. The IRS doesn't take your word for it. And the documentation most founders have is thinner than they realize.
Here's what I look for when I'm reviewing a QSBS position:
Does the issuance record hold together? You should have a copy of your stock purchase agreement and a stock certificate or receipt evidencing your shares.
Can you establish the gross asset test was satisfied at issuance? §1202 requires that the corporation's gross assets were below a statutory threshold at the time your stock was issued. The practical solution is a certification from the company's CFO or CEO confirming that was the case. That's one of the five confirmations in the QSBS Confirmation Letter Template.
Is the active business requirement supportable? At least 80% of corporate assets must have been used in a qualified active business throughout your holding period. Companies that raised a big round and sat on cash for a while, or that shifted their business model, can have gaps here.
This isn't just a one-time question. The active business requirement must be satisfied throughout your holding period. An annual written confirmation from the company that it continues to meet the requirement is good practice — and much easier to produce than reconstructing years of history under audit pressure.
No disqualifying redemptions. §1202 prohibits significant redemptions of stock from the shareholder or a related party within two years before or after your stock was issued. This is something the company needs to confirm — you likely won't know this on your own.
Was the stock originally issued to you? §1202 requires original issuance. Transfers, secondary purchases, and certain exchanges can break eligibility. If your shares changed hands or you converted from a different instrument, that needs scrutiny.
The hard reality: most of these facts are set years before the exit. If your records aren't clean now, they're harder to reconstruct later — especially under audit pressure.
The QSBS Confirmation Letter Template covers the five key factual confirmations a company can make to a shareholder about their stock's §1202 status. It won't replace legal advice, but it's a concrete starting point.
Questions about your specific situation? Get in touch.
