This FAQ page addresses common questions about Qualified Small Business Stock (QSBS), Section 83(b) elections, and regulatory changes affecting startups in Seattle. It is for informational purposes only and does not constitute legal or tax advice.
What is Qualified Small Business Stock (QSBS) and who can benefit from it?
Qualified Small Business Stock (QSBS) refers to shares issued by a U.S. C corporation that meet the requirements of Section 1202 of the Internal Revenue Code. Under these rules, founders, investors, contractors, and employees who receive stock directly from the company and hold it for more than five years can potentially exclude up to $15 million of capital gain from federal income tax when they sell.
What changes to QSBS were introduced by the Big Beautiful Bill of 2025?
The Big Beautiful Bill, signed on July 4, 2025, introduced several major changes to Section 1202. It established a tiered exclusion schedule, allowing a 50 % exclusion of capital gains after a 3‑year holding period, 75 % after 4 years, and 100 % after 5 years. The per‑issuer gain exclusion cap increased from $10 million to $15 million for QSBS acquired after July 4 2025, with annual inflation adjustments. The asset threshold for a corporation to qualify as a 'qualified small business' also rose from $50 million to $75 million.
Why should founders avoid S‑corporation status if they want QSBS benefits?
Stock issued by an S corporation can never qualify as QSBS. Even if the S election is revoked later, shares issued while the S election was in effect remain permanently disqualified. Founders should therefore choose a C‑corporation structure at formation if they wish to preserve QSBS eligibility.
What are the main requirements to qualify for QSBS?
To qualify as QSBS, stock must be issued by a U.S. C corporation (not an LLC or S‑corp), be issued after August 10, 1993, belong to a company engaged in a qualified business (not excluded industries such as professional services or finance), be acquired in exchange for money, property (other than stock), or services, and be held for more than five years.
What mistakes can disqualify QSBS eligibility?
Common pitfalls include forming as an LLC and later converting to a C‑corp (delaying the five‑year holding period), engaging in disqualified business activities, exceeding the $75 million gross asset limit, failing to devote at least 80 % of assets to the qualified business, poor recordkeeping, and redeeming or repurchasing stock in ways that violate Section 1202 rules.
How does the new online filing option work for Section 83(b) elections?
In late 2024, the IRS introduced Form 15620, allowing taxpayers to make Section 83(b) elections online. Previously, taxpayers had to mail a physical statement to the IRS. Now, they can create an IRS online account, complete Form 15620 on the IRS website, and submit it electronically. After submission, taxpayers can download a copy of the filed form for their records.
What deadlines apply to Section 83(b) elections?
A Section 83(b) election must be filed within 30 days of the transfer of equity. There are generally no exceptions to this deadline, so prompt action is critical. Employers should track the 30‑day window and ensure employees or service providers make timely filings.
What happened to FinCEN’s beneficial ownership reporting requirement in 2025?
In March 2025, the Financial Crimes Enforcement Network (FinCEN) announced that it would not issue fines or penalties for failure to file beneficial ownership information (BOI) reports by the existing deadlines. The agency plans to issue a new interim final rule extending deadlines and clarifying requirements. Until the rule becomes effective, no enforcement actions will be taken.
Why is QSBS more attractive now for founders and investors?
The Big Beautiful Bill makes QSBS more attractive by shortening the holding period for partial exclusions, raising the per‑issuer gain cap to $15 million, and expanding eligibility to companies with up to $75 million in assets. These changes provide greater flexibility for exits and larger potential tax savings for founders, investors, and employees.
Are there state tax considerations when using QSBS?
Yes. While federal law allows exclusion of capital gains on QSBS, some states—including California and New Jersey—do not fully conform to Section 1202. Therefore, taxpayers may still owe state capital‑gains tax on QSBS. It’s important to consult state‑specific tax rules when planning your exit strategy.