Section 1202 uses two different measures that are easy to confuse: tax basis and fair market value. One decides whether the corporation qualifies as a qualified small business. The other decides the size of a shareholder's exclusion. Mix them up and you can get the wrong answer on both questions.
There are really two separate questions hiding inside “do I have QSBS?”
- Does the company qualify?
- How much can the shareholder exclude?
They run on different rules. Here is the difference at a glance:
| Company-Level Test | Shareholder-Level Test |
|---|---|
| Purpose: QSBS qualification | Purpose: 10× basis exclusion cap |
| Metric: Adjusted tax basis of the corporation's assets, plus cash | Metric: The shareholder's basis in the stock |
| Statute: §1202(d)(2)(A) | Statute: §1202(b)(1)(B) |
| Contributed property: Counted at FMV at contribution under §1202(d)(2)(B) | Contributed property: Stock basis deemed no less than FMV of property contributed under §1202(i)(1)(B) |
Question 1: Does the company qualify? (The gross-assets cap)
To issue qualified small business stock, the corporation has to be a “qualified small business.” After the One Big Beautiful Bill Act, that means aggregate gross assets of $75 million or less — up from $50 million — for stock issued after July 4, 2025. The test is applied at all times before issuance and immediately after.
Here is the part people miss. “Aggregate gross assets” means cash plus the aggregate adjusted tax basis of the corporation's other property — not its fair market value. See §1202(d)(2)(A).
That distinction is enormously favorable. A C corporation can be worth $300 million in enterprise value and still sail under the $75 million cap, because you count the basis of its assets, not what they are worth. Organic appreciation — a valuable brand, IP the company developed in-house, a growing book of business — is invisible to this test. The cap measures how much capital has gone into the company, not what the company is now worth.
A software company whose code was developed internally may have very little tax basis in its single most valuable asset. That is one reason rapidly appreciating startups often remain well below the gross-assets cap despite high valuations.
The wrinkle: contributed property is counted at FMV
There is one important exception, and it is an anti-abuse rule. When property is contributed to the corporation, its basis for the gross-assets test is deemed to equal its fair market value at the time of contribution — not its carryover basis. See §1202(d)(2)(B).
Congress did this on purpose. Without it, you could drop highly appreciated, low-basis property into a corporation and use the artificially low carryover basis to slip under the cap. The FMV rule shuts that down. For property the company holds and develops, the test runs on tax basis; for property dropped in, it runs on FMV.
Question 2: How much can the shareholder exclude? (The 10× cap)
Even when the company qualifies, the shareholder's exclusion is itself capped. For each issuer, the most a shareholder can exclude is the greater of $15 million (after OBBBA; $10 million for older stock) or 10 times the adjusted basis of the shareholder's stock. See §1202(b)(1)(B).
Here is where fair market value returns — at a different level, for a different purpose. When a shareholder contributes property to a corporation in exchange for stock, §1202(i)(1)(B) provides that the basis of the stock is, for Section 1202 purposes, deemed to be no less than the fair market value of the property contributed. The stock basis tracks FMV, not the carryover basis a shareholder might otherwise expect.
So at the entity level, qualification runs on tax basis. At the shareholder level, the exclusion cap runs on a stock basis that is floored at FMV. Same statute, opposite measures.
Where the two collide: contributing appreciated property
Put both rules on the same fact pattern and you get a genuine double-edged sword. Suppose a shareholder contributes property worth $20 million, with a tax basis of $2 million, in exchange for stock.
- For the company's gross-assets test, that property counts at its $20 million FMV — eating $20 million of the $75 million qualification headroom.
- For the shareholder's 10× cap, the same contribution produces a $20 million stock basis instead of $2 million — which means a $200 million exclusion ceiling instead of $20 million.
One move, two opposite effects: it shrinks the company's room to qualify, and it expands the shareholder's room to exclude. Whether that trade is worth making depends on the numbers and on what else is going into the company. It is a planning decision, not a default.
The takeaway
The gross-assets test asks how much tax basis is inside the corporation. The 10× cap asks how much basis the shareholder has in the stock. They are different questions, governed by different rules, and contributed property affects them in opposite directions.
Confuse the two and you make one of two mistakes — assuming a company qualifies when contributed FMV has quietly blown the cap, or undervaluing the exclusion ceiling because the FMV floor on stock basis was forgotten.
The cleanest way to avoid both is to pin the facts down early and in writing: the company's gross-assets position as of each issuance, and the FMV of any property contributed for stock. Those facts are easy to establish today and nearly impossible to reconstruct years later at exit. That is the entire point of an annual QSBS attestation.
If you are contemplating contributing appreciated property to a C corporation — or converting an LLC and wondering what it does to both caps — that is a conversation worth having before you sign, not after. Book a 20-minute call.
This post is general information, not legal or tax advice, and does not create an attorney-client relationship. Section 1202 is fact-specific; consult your own advisor about your situation.
