Published on Feb 1, 2026 • Updated on Jun 23, 2026
This article was written by Salvatore M. Capizzi
Salvatore M. Capizzi, CEPA, CBDA, is Dunham's Chief of Sales & Marketing and a 2026 Wealthies CMO of the Year Finalist. His work focuses on retirement planning, emerging trends for financial advisors, and advanced tax, trust, and estate strategies.
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As financial advisors, we always search for strategies that deliver value to our clients. And one of the most powerful yet underutilized tax benefits available today is IRC 1202, which governs Qualified Small Business Stock (QSBS). This provision offers a significant opportunity for eligible business owners to eliminate capital gains taxes when selling their business.
Let me share why this matters to your practice and your clients.
In 1993, as America emerged from recession, Congress created Section 1202 to stimulate small business investment, offering a 50% capital gains exclusion. The 2009 financial crisis prompted an increase to 75%, but the real change came on September 27, 2010, when the Small Business Jobs Act raised the exclusion to 100%.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 made this 100% exclusion permanent, turning what began as a modest tax incentive into one of the most powerful tax planning tools available to business owners today.
Here are the specific dates that determine your client's exclusion rate.
Keep in mind, there is a five-year holding period requirement, which I discuss more below. This rule always applies regardless of the acquisition date.
At its core, IRC 1202 allows qualifying business owners to exclude a significant portion of their capital gains from federal taxation when they sell their business. The exclusion can be either the greater of $10 million or 10 times the stock's adjusted basis.
However, like most valuable tax benefits, qualification requirements are specific and complex. They must be discussed with experienced legal and tax experts before your client or prospect takes any action.
The first thing to understand is that this benefit is exclusively for C-corporations.
Many of your business owner clients might operate S-corporations or LLCs, but for those starting new ventures or considering entity conversion, this could be a compelling reason to choose C-corporation status. The business must be an active qualifying enterprise, company assets must be under $50 million at stock issuance, and shares must be held for at least five years.
Example: An entrepreneur invests $1M in a qualifying C-Corp. Ten years later, the business is sold for $15M. Under IRC 1202, the $14M gain could be fully excluded from federal taxation — provided the stock was original issuance, held for 5+ years, and the company met the <$50M (or <$75M post-July 2025) gross assets and active business requirements.
Many of your business owner clients could qualify, particularly those in technology and software development, manufacturing, wholesale and retail, and construction.
However, certain service-based businesses are excluded - including:
Some businesses engage in mixed activities - which means certain portions may qualify while others do not. This complexity is why we always suggest that your client or prospect work with qualified tax professionals to determine eligibility.
Your clients or prospects must maintain detailed records from the moment of stock acquisition. These include stock certificates with issuance dates, corporation asset valuations at issuance, business activity records, basis calculations, and detailed transfer records if the stock was acquired through gift or inheritance.
Proper documentation from the start can prevent significant challenges when it comes time to claim the exclusion.
The timing of investments and entity structure decisions is important. For new businesses, the choice of entity structure should consider IRC 1202 benefits alongside other factors like operational flexibility, tax, and governance requirements.
For existing businesses, conversion analysis might present opportunities to restructure, especially when the S-Corp or LLC has a strong net cash flow and selling the business in a few years is a current consideration. Exit planning must account for the five-year holding period requirement, making early planning essential.
Review your clients or prospects in town for business owners who might benefit from IRC 1202 planning.
Remember, the key to maximizing these benefits is early planning. The five-year holding requirement means timing and proper initial structure are important to successfully implement this structure.
Possible points:
Assuming all small business stock qualifies.
Waiting until the year of sale to review eligibility.
Failing to document original issuance.
Converting from an LLC or S-Corp without analyzing the five-year holding period.
Ignoring excluded industry rules.
Overlooking state tax treatment.
Trying to use stacking or packing strategies without coordinated tax and legal guidance.
To potentially qualify for IRC 1202 treatment, confirm whether:
The company is a domestic C-Corporation.
The stock was acquired at original issuance.
The shareholder is generally a non-corporate taxpayer.
The stock was held for the required holding period.
The company met the gross asset test when the stock was issued.
At least 80% of company assets were used in an active qualified trade or business.
The company is not in an excluded service-based industry.
The shareholder has documentation supporting issuance date, basis, valuation, and business activity.
As an advisor, understanding IRC 1202 positions you to identify planning opportunities for existing business owner clients, attract new clients through sophisticated tax planning knowledge, strengthen relationships with centers of influence, and add substantial value through proactive planning.
Your Dunham Regional Director and Business Development Team can help you with creative IRC 1202 planning. We can help clients multiply the benefits of IRC 1202 through several advanced strategies.
An example of this planning is "stacking," which uses completed gift trusts to significantly multiply the exclusion amount. Strategic timing of investments can maximize the basis while coordinating exit planning and ensuring holding period requirements are met.
Gift timing strategies that preserve QSBS status can create opportunities for the next generation. These planning opportunities require careful coordination with tax and legal professionals, positioning you as the quarterback of your client's advisory team.
Consider the impact on your practice. By mastering IRC 1202 strategies, you position yourself as a sophisticated advisor who understands complex planning opportunities.
This knowledge can help you attract and retain high-net-worth business owner clients, strengthen relationships with centers of influence, and differentiate your practice in a crowded marketplace.
To learn more about how IRC 1202 can benefit your practice and clients, contact our Business Development Team at 858-880-5778 for your complete Financial Advisor Guide to IRC 1202.
This comprehensive resource will help you identify opportunities and implement effective strategies for your business-owned clients.
What is the QSBS exclusion?
The QSBS exclusion is a tax benefit under IRC Section 1202 that may allow eligible non-corporate taxpayers to exclude part or all of the capital gain from selling qualified small business stock.
How long do you have to hold QSBS?
QSBS generally must be held for the required holding period before the shareholder can claim the exclusion. Full eligibility often depends on holding the stock for more than five years, although newer rules may create different partial exclusion opportunities for certain post-July 4, 2025 stock.
Can LLCs qualify for QSBS?
An LLC itself does not qualify unless it is treated as a C-Corporation for tax purposes and meets the other IRC 1202 requirements.
Can S-Corp stock qualify for QSBS?
No. QSBS generally must be stock issued by a domestic C-Corporation.
Which industries are excluded from QSBS?
Excluded businesses generally include many service-based businesses, including fields such as law, health, consulting, financial services, brokerage services, and other businesses where the principal asset is the reputation or skill of employees.
Does QSBS apply to state taxes?
Federal QSBS treatment does not automatically determine state tax treatment. Some states conform to the federal exclusion, while others may limit or disallow it. Business owners should confirm state-level treatment with a qualified tax advisor.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information.
Federal and state laws and regulations are complex and subject to change, which can materially impact your results.
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