Qualified Small Business Stock (QSBS) under IRC Section 1202 can eliminate millions of dollars of capital gains tax for founders, early employees, and investors. But QSBS eligibility is fragile, fact-dependent, and easy to lose—and very hard to reconstruct years later.
That’s why companies should strongly consider preparing Section 1202 attestation letters at formation and at key early issuance events.
QSBS eligibility is not self-proving
The QSBS exclusion is claimed by the shareholder, often many years after stock issuance. At that point, the burden of proof sits squarely on the taxpayer. Unfortunately, the facts that matter most for QSBS—asset levels, business activities, redemptions, capitalization details—are often the least well-documented over time.
Memories fade. Cap tables change. Early board approvals and balance sheets disappear.
An attestation letter captures the facts when they are clean.
What is a Section 1202 attestation letter?
A QSBS attestation letter is a contemporaneous written confirmation—typically prepared by counsel or an accounting firm—that documents a company’s compliance with Section 1202 at a specific point in time (usually formation or early issuances).
These letters are not legally required. But they are increasingly viewed as best practice.
A typical letter confirms that:
- The company is a domestic C corporation
- Gross assets did not exceed the applicable threshold ($50M for pre-July 5, 2025 issuances; $75M thereafter)
- At least 80% of assets were used in the active conduct of a qualified trade or business
- Stock was issued directly by the company for money, property, or services
- No disqualifying redemptions or other red flags existed
Some letters also tie directly to specific issuances and shareholders.
Why timing matters
QSBS eligibility can be lost unintentionally:
- Excess cash or passive assets
- Redemptions that taint earlier issuances
- Business pivots into excluded service categories
- Poor capitalization discipline
Once lost, eligibility cannot be retroactively recreated.
An attestation letter forces discipline at precisely the moment when compliance is easiest—and most valuable.
Audit defense and investor diligence
Years later, when a shareholder claims the QSBS exclusion on a tax return, an attestation letter provides powerful contemporaneous evidence. It also increasingly shows up in diligence requests from investors, acquirers, and tax advisors.
In short: it reduces friction when it matters most.
A low-cost, high-leverage step
Compared to the potential tax benefit—often $10 million or more per holder—QSBS attestation letters are inexpensive. Many companies now prepare them alongside early financings, 409A valuations, or cap table cleanup.
They are not a guarantee. But they dramatically improve clarity, defensibility, and outcomes.
Bottom line:
If you care about QSBS, document it early. A contemporaneous Section 1202 attestation letter is one of the simplest ways to protect a future tax benefit that is otherwise easy to lose and impossible to reconstruct.
