You've held your stock for five years. The company stayed a C-corp. You think you're sitting on a tax-free gain of $10 million or more. But when the IRS audits your §1202 exclusion, can you actually prove it?
For most founders, the honest answer is: probably not. QSBS is a fact-intensive tax benefit. The IRS doesn't take your word for it — it looks for documentation. And the records most founders have are thinner than they realize.
Here's the five-point checklist I run through when 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 the company's assets must have been deployed in a qualified active trade or business throughout your holding period — not just at issuance. This is the trickiest part of the test, and it's where silent gaps most often appear. A company that closed a Series A and parked $8M in treasury bills while hiring slowly could fail this test for the months that cash sat idle. A pivot to a new business line mid-hold creates another gap. This requirement needs to be true continuously, not just at the moment you sold.
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.
For the section-by-section breakdown of what a strong QSBS attestation letter actually needs to say, see my detailed walkthrough — header, gross-assets math, active-business confirmation, original-issuance reps, and the redemption history language IRS agents look for.
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.
If you have your stock purchase agreement, a CFO certification confirming the gross asset test and active business status, confirmation of no disqualifying redemptions, and documentation showing original issuance — you're in good shape. If any of those are missing or uncertain, that's worth addressing now, not at closing.
Want a second set of eyes on your QSBS position before a sale or liquidity event? Book a fixed-fee §1202 issue-spotting review — I'll flag any gaps while there's still time to address them.
