TOC-23 TOC-23
Tax & Estate Planning

IRC Section 1202 —
Qualified Small
Business Stock

A practical guide to one of the most powerful — and most underutilized — tax advantages in the U.S. code, significantly expanded by the One Big Beautiful Bill Act of 2025.

Prepared by The Oglethorpe Collective Current as of 2026 Tax Year
Post-OBBBA
Section One

Understanding Qualified Small
Business Stock

IRC Section 1202 allows investors in qualifying private companies to exclude up to 100% of their federal capital gains upon sale — but eligibility must be established at the time of investment, well before any liquidity event.

The Core Benefit Hold qualifying stock for five or more years and exclude up to 100% of eligible gains from federal capital gains tax — subject to a per-taxpayer dollar cap or a multiple of your original basis, whichever is greater. With proper planning, that cap can be multiplied across family members and trust structures.
Company Must Be
✓
A domestic C-Corporation (not S-Corp, LLC, or LP)
✓
Gross assets within the statutory limit at and immediately after issuance
✓
Operating in a qualified industry — not an excluded trade or business
✓
Free of disqualifying stock repurchases within the applicable lookback window
Investor Must
✓
Be a non-corporate taxpayer — individual, trust, or pass-through entity
✓
Acquire stock at original issuance directly from the company
✓
Exchange money, property, or services — not purchase on the secondary market
✓
Hold through the required minimum period before any qualifying sale
Excluded Industries Professional services (law, finance, health, consulting), banking, insurance, leasing, farming, hospitality, and extractive industries do not qualify. Technology, life sciences, manufacturing, and retail-oriented businesses typically do.
Section Two

What the Opportunity Looks Like

The One Big Beautiful Bill Act — signed July 4, 2025 — materially expanded QSBS. Key thresholds were raised, a tiered holding schedule was introduced, and new structural strategies emerged for sophisticated investors.

$15M
Per-Taxpayer Cap
Federal exclusion ceiling per investor, per issuer. Raised from $10M. Inflation-indexed going forward.
Updated — OBBBA
$75M
Gross Asset Limit
Company's aggregate tax basis at issuance may now reach $75M (was $50M). For new stock issued after July 4, 2025, the $75M threshold applies retroactively to 1993 when measuring a company's gross asset history.
Updated — OBBBA
10×
Basis Alternative
Alternatively, exclude up to 10× adjusted basis per issuer — unchanged, but now the larger lever for well-structured investments.
Unchanged
$750M
New Theoretical Ceiling
With a $75M gross asset company and the 10× basis rule, a single investor could potentially exclude up to $750M in gain.
New Maximum
Tiered Exclusion Schedule — Stock Acquired After July 4, 2025
3 Years
50% Excluded
4 Years
75% Excluded
5+ Years
100% Excluded
Stock acquired before July 4, 2025 is not subject to the tiered schedule — the full 100% exclusion applies at 5 years under prior law.
Why This Matters Now The combination of a higher gross asset threshold, a raised per-taxpayer cap, and the unchanged 10× basis rule creates a meaningful window for investors who structure early and hold intentionally. Clients with active private market portfolios, pre-IPO positions, or startup exposure may already hold qualifying stock without realizing it.
Critical: State Tax Does Not Follow Federal Law California, Pennsylvania, Alabama, and Mississippi do not conform to Section 1202 — in these states, the full gain is taxable at state rates, up to 13.3% in California. Washington D.C. enacted emergency legislation in late 2025 to decouple from the expanded QSBS exclusion. Hawaii allows only a 50% exclusion even when federal law permits 100%. Note: New Jersey conformed to Section 1202 effective January 1, 2026. Domicile planning prior to a liquidity event is an essential part of the QSBS conversation for clients in non-conforming states.
Section Three

How to Multiply the Benefit

QSBS is not just a passive reward for holding stock — it is an active planning tool. By distributing shares across multiple taxpayers before a liquidity event, families can dramatically increase their total federal exclusion and after-tax outcome.

01
Stacking
Multiply Exclusions Across Taxpayers
Each taxpayer receives their own $15M exclusion cap per issuer. Gifting shares to a spouse, children, and non-grantor trusts — each a separate taxpayer — multiplies the available exclusion substantially. Gifts transfer the original holding period, making early gifting critical.
02
Packing
Increase Basis to Maximize the 10× Rule
The OBBBA's largest new opportunity. By increasing inside basis through entity conversions (pass-through to C-Corp) or high-value asset contributions, the 10× rule can far exceed the $15M dollar cap. With $75M in qualifying gross assets, the ceiling reaches $750M.
03
Section 1045
Roll Gains Forward If the Hold Isn't Met
If a qualifying company is sold before 5 years, investors have 60 days to roll the gain into new QSBS — preserving the holding period clock. This is a critical bridge for investors facing unexpected liquidity events or early secondary market opportunities.
Case Study: The Cost of Not Planning
Illustrative Example
Original Investment
$2M
Invested at original issuance in a qualifying C-Corp
Exit Price (Year 7)
$62M
Sold after 5+ year hold — 100% exclusion eligible
Total Gain
$60M
Subject to federal tax absent QSBS planning

Federal Tax Impact — Before & After Planning

⬤  Without Stacking — Single Taxpayer
Total Gain$60M
QSBS Exclusion (1 taxpayer, $15M cap)−$15M
Remaining Taxable Gain$45M
Federal Tax @ 23.8%−$10.71M
After-Tax Proceeds$49.29M
⬤  With Stacking — Four Taxpayer Buckets
Total Gain$60M
Combined QSBS Exclusion (4 × $15M)−$60M
Remaining Taxable Gain$0
Federal Tax$0
After-Tax Proceeds$62M

How Shares Were Distributed Before Exit

Taxpayer / Bucket Gift Timing FMV at Gift Date Lifetime Exemption Used Gain Excluded at Exit
Original Investor At issuance $2M (cost basis) None — original holder $15M
Spouse via SLAT (Non-Grantor) Year 1 ~$2M ~$2M $15M
Irrevocable Trust #1 (Non-Grantor) Year 1 ~$2M ~$2M $15M
Irrevocable Trust #2 (Non-Grantor) Year 1 ~$2M ~$2M $15M
Total ~$6M total exemption used $60M
Why Early Gifting Matters — The Gift Tax Dimension
Per gifted bucket (25% of shares) · 2026 lifetime exemption: $15M/person · Annual exclusion: $19K/recipient
Early Gift — Year 1 (This Case Study)
Company FMV at gift date~$8M
FMV of 25% gifted~$2M
Lifetime exemption consumed~$2M
Exemption headroom remaining~$13M
Value at exit (25% of $62M)$15.5M
Appreciation transferred tax-free$13.5M
Late Gift — Year 6 (Pre-Exit)
Company FMV at gift date~$55M
FMV of 25% gifted~$13.75M
Lifetime exemption consumed~$13.75M
Exemption headroom remaining~$1.25M
Value at exit (25% of $62M)$15.5M
Appreciation transferred tax-free$1.75M
◆
The early gifting advantage: By gifting at Year 1 when the company was valued at ~$8M, each 25% block was worth only ~$2M — consuming just $2M of the $15M lifetime exemption per donor (2026 figure). All $13.5M of subsequent appreciation in each bucket moves to the donee completely free of gift and estate tax. Wait until Year 6, and each bucket consumes nearly the entire lifetime exemption, leaving almost no room for other estate planning — while capturing only $1.75M in tax-free appreciation. Same QSBS outcome, dramatically different exemption cost. Additionally, minority interests in private companies may qualify for valuation discounts — typically 15–35% for lack of control and lack of marketability — meaning the FMV reported for gift tax purposes can be meaningfully lower than the pro-rata enterprise value, further reducing the exemption consumed and extending the planning runway.
$10.71M
Federal Tax
Saved
$62M
After-Tax Proceeds
vs. $49.29M without planning
4×
Exclusion Multiplier
via stacking across taxpayers
Key Planning Notes Gifts must be made before a liquidity event is probable — transfers close to a known exit will be challenged by the IRS. Gift valuation is determined at the time of transfer: gifting early when shares carry a low 409A-supported FMV preserves lifetime exemption capacity and moves all future appreciation out of the estate tax-free. Each non-grantor trust must be maintained as a fully independent taxpayer. Spousal gifts are generally unlimited under the marital deduction but do not create a new QSBS exclusion cap unless the donee spouse is a separate taxpayer. State tax treatment must be analyzed independently — non-conforming state residents receive no state-level benefit. All federal figures use the top LTCG rate of 23.8% (20% + 3.8% NIIT). Consult qualified tax and estate counsel before implementation.

* 23.8% = top federal long-term capital gains rate (20%) plus Net Investment Income Tax (3.8%). State taxes not included. Company FMV figures are illustrative; actual valuations require a qualified 409A appraisal. 2026 lifetime gift/estate tax exemption: $15M per person ($30M per couple); annual exclusion: $19,000 per recipient. Exemption is now permanent under OBBBA and inflation-indexed annually.

Section Four

How TOC-23 Guides Clients
Through the QSBS Lifecycle

QSBS planning is not a single conversation — it spans the full life of an investment. Click any phase below to see how we support clients from initial qualification to post-exit redeployment.

Phase 01 — Pre-Investment
Qualification Review
Before capital is deployed, we review the target company's legal structure, gross asset position, and industry classification to confirm QSBS eligibility. Many investors miss this step entirely and forfeit the exclusion retroactively — there is no fix after issuance if the stock doesn't qualify.
C-Corp structure confirmation
Gross assets analysis
Industry eligibility screen
QSBS representation language
Phase 02 — At Issuance
Documentation & Basis Tracking
The five-year clock starts the moment stock is issued. We coordinate documentation of original acquisition, establish adjusted basis records, and initiate the holding period log — the foundation for every exclusion calculation and gift transfer that follows.
Issuance documentation
Adjusted basis ledger
Holding period initiated
Taxpayer records established
Phase 03 — Years 1–4
Ongoing Monitoring & Early Gifting
We monitor company milestones and identify the optimal window for gifting shares to spouses, children, and non-grantor trusts. Early gifting is critical: shares are valued lower, minimizing gift tax exposure while the original holding period transfers in full to each donee — multiplying the available exclusion before values rise.
Annual gross asset monitoring
Gift timing strategy
Non-grantor trust setup
Stacking structure design
Phase 04 — Year 5+
Pre-Liquidity Analysis
As the investment matures, we run a full stacking analysis — modeling the total exclusion available across all taxpayers and entities, comparing the $15M per-taxpayer cap against the 10× basis rule for each bucket. We also stress-test each structure for IRS defensibility and layer in domicile planning for clients in non-conforming states.
Full stacking model
Cap vs. 10× comparison
State tax review
Domicile planning
Phase 05 — Exit Event
Exclusion Execution & Tax Coordination
At sale, we coordinate with tax counsel to confirm eligibility for each taxpayer, document the exclusion claims, and manage transaction timing. If the 5-year threshold has not been met, we evaluate a Section 1045 rollover — reinvesting proceeds into new qualifying QSBS within 60 days to preserve the holding period.
Eligibility confirmation
Tax counsel coordination
Section 1045 rollover evaluation
Transaction timing
Phase 06 — Post-Exit
Redeployment & Forward Planning
After a QSBS exit, the freed capital needs a home. We help clients identify new QSBS-eligible investment opportunities, re-establish planning infrastructure for future positions, and integrate the exit into the broader family wealth picture — including estate planning, philanthropy, and next-generation allocation.
Proceeds management
New QSBS opportunity identification
Estate & gift integration
Portfolio rebalancing
Connect With Us

Ready to assess your QSBS exposure?

Whether you're evaluating a new investment, holding existing positions, or approaching a liquidity event, we can identify where planning opportunities exist and help you build a structure that captures the full benefit. QSBS is time-sensitive — the earlier planning starts, the more levers remain available.

TOC-23
The Oglethorpe
Collective
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This report may include information about your accounts at various custodians and supplied by third party investment managers, administrators and the client. The reporting technology is provided by a third-party vendor that is not affiliated with Inflection Capital Management, LLC ("ICM") dba The Oglethorpe Collective, LLC ("TOC-23"). The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness and we assume no liability for damages resulting from or arising out of the use of such information. Additionally, because we do not render legal or tax advice, this report should not be regarded as such.

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