QSBS qualification is not a one-time event. Stock that qualified under Section 1202 on the day it was issued can stop qualifying while you hold it — and the problems that surface in diligence at exit are almost never fixable by then. Half of 2026 is gone. If your company raised money, bought back stock, converted notes, or changed its structure in the last six months, now is the time to verify that nothing broke, while the records are fresh and the people who know the answers still work there.
Here is the checkpoint, in the order problems actually appear.
1. Confirm which regime each block of stock is in
OBBBA split Section 1202 into two regimes, and the boundary matters:
- Stock issued on or before July 4, 2025: $10M (or 10x basis) exclusion cap, $50M gross-asset ceiling, and 100% exclusion only at 5 years.
- Stock issued after July 4, 2025: the greater of $15M or 10x basis, a $75M gross-asset ceiling, and a tiered 50/75/100% exclusion at 3/4/5 years.
If your company issued stock in the first half of 2026 — a priced round, SAFE or note conversions, option exercises — that stock is in the new regime. Your cap table now likely holds both regimes side by side, and the exclusion math at exit is different for each block. Map it now, not in a data room.
2. Test gross assets at every 2026 issuance date
The gross-asset ceiling is tested at issuance — immediately before and after each issuance of stock (IRC § 1202(d)). Crossing the ceiling later does not disqualify stock already issued, but any stock issued after the company crosses it does not qualify.
The mid-year question: did any first-half 2026 issuance — including SAFE and convertible note conversions at a priced round — happen after aggregate gross assets exceeded $75M (or $50M, for any pre-boundary issuance you are re-verifying)? Companies that raised significant rounds in 2025–2026 are exactly the ones that trip this without noticing, because conversions issue stock automatically and nobody runs the test on conversion day.
Capture the supporting financial statements for each issuance date now. Reconstructing gross assets as of a specific day two years later is expensive and sometimes impossible.
3. Check the redemption windows
Section 1202(c)(3) disqualifies stock two ways:
- Related-party purchases: stock is not QSBS if the corporation purchased stock from the holder or a related person within the four-year window beginning two years before the issuance.
- Significant redemptions: stock is not QSBS if the corporation made redemptions exceeding 5% of the aggregate value of all of its stock — measured as of the beginning of the two-year window that starts one year before the issuance.
The regulations provide de minimis exceptions and carve-outs for repurchases tied to termination of services, death, disability, and divorce (Treas. Reg. § 1.1202-2), but the windows are mechanical and unforgiving outside them.
The mid-year question: did the company repurchase any stock in the first half of 2026 — a departing founder buyback, a tender, a cleanup of a former employee's shares? If so, that repurchase can taint stock issued up to a year (or, for the seller and related persons, two years) on either side of it, including issuances that haven't happened yet. Before any buyback in the second half of the year, run the analysis first.
4. Re-run the active business requirement — the test that breaks quietly
Section 1202(e) requires that at least 80% of the corporation's assets, by value, be used in the active conduct of a qualified trade or business during substantially all of the holder's holding period. This is a continuing test. It is the requirement most likely to fail mid-stream, and the failure mode is mundane: the company closes a large round, the cash sits, and the balance sheet stops looking like an operating business.
Working capital counts as an active-business asset only within the limits of § 1202(e)(6) — funds reasonably required for the business or held for research and experimentation, with a two-year expectation for deployment. Separate limits apply to portfolio stock and to real estate not used in the business.
The mid-year question: if the company raised in the last 18 months, what does the asset mix look like today, and can you document the deployment plan for the cash? A board-approved use-of-proceeds plan and periodic asset-composition snapshots are cheap insurance. The absence of them is what turns a defensible position into a diligence fight.
5. Verify entity status and holding-period clocks
Two fast checks:
- Entity status. The corporation must be a domestic C corporation during substantially all of the holding period. An S election — even a brief, later-revoked one — is the kind of event that surfaces in year-three diligence. Confirm nothing was filed.
- Holding-period clocks. For option holders, the QSBS clock starts at exercise, not grant. For restricted stock without an 83(b) election, it starts tranche by tranche at vesting; with a timely 83(b), it starts at the transfer date. For RSUs, it starts at share delivery. If anyone on your cap table exercised options or filed an 83(b) election in the first half of 2026, record the operative dates now — those dates set both the federal exclusion tier and the earliest possible qualifying sale.
6. Capture the evidence while it exists
Every item above turns on documentation that is easy to assemble today and hard to assemble at exit: financial statements as of issuance dates, board minutes, cap table snapshots, payroll and asset breakdowns supporting the 80% test, copies of 83(b) elections with proof of timely filing. QSBS diligence at acquisition is a paper exercise. The sellers who collect the paper annually clear it in days; the ones who don't spend the exclusive-negotiation period reconstructing 2026 from memory.
The Washington angle
For Washington founders, the stakes compound. Washington has no tax on ordinary income today. It taxes long-term capital gains at 7% above the inflation-adjusted standard deduction ($278,000 for tax year 2025), plus 9.9% on the portion of gain above $1M. Gain excluded under IRC § 1202 falls outside the Washington capital gains base. A separate 9.9% tax on household income above $1M (ESSB 6346) takes effect January 1, 2028 — unless voters approve Initiative 645 (certified July 15, 2026 for the November 3, 2026 ballot) or the pending constitutional challenge succeeds.
A preserved Section 1202 exclusion is therefore a double exclusion for Washington founders — federal and state. A broken one is a double miss.
What to do with this
If you can answer every question above from documents you already have, you are in good shape — file the documents somewhere your deal counsel will find them.
If you can't, that is the gap an annual QSBS attestation closes: a yearly review of the qualification requirements against the company's actual activity, with the supporting evidence collected while it still exists. That is what QSBS Sentinel™ does.
Questions about your specific situation? Schedule a 20-minute call.
This post is for general information and is not legal or tax advice for any specific situation.
