QSBS Pre-Sale Review: Confirm Your Section 1202 Exclusion Before You Sell

Who a QSBS Pre-Sale Review is for

• Founders and early employees of a C corporation that may be one to five years from a sale or IPO.
• Angel and early-stage investors holding stock bought directly from the company.
• Owners who received a letter of intent and need to know their after-tax result before negotiating.
• Families considering gifts or trusts of founder stock before a liquidity event.

The review is most valuable well before a sale. Some of the most useful planning has to be done before there is a binding agreement.

What QSBS requires

The exclusion applies only if several tests are met, some at issuance and some throughout your holding period. In general:

• C corporation stock. The issuer must be a domestic C corporation. LLC units, partnership interests, and S corporation stock do not qualify.
• Original issuance. You generally must acquire the stock directly from the company, not from another shareholder.
• Gross assets test. The company’s gross assets must not exceed $50 million at issuance for stock issued on or before July 4, 2025, or $75 million for stock issued after that date.
• Active business test. At least 80% of the company’s assets must be used in a qualified trade or business during substantially all of your holding period.
• Qualified field. Businesses in certain fields, such as health, law, consulting, financial services, and others based on the reputation or skill of employees, are excluded.
• Holding period. More than five years for stock issued on or before July 4, 2025. For later stock, the exclusion is 50%, 75%, or 100% after three, four, or five years.

The exclusion is generally capped per company at the greater of a dollar limit or 10 times your basis. The dollar limit is $10 million for older stock and $15 million for stock issued after July 4, 2025.

Common reasons stock fails to qualify

Most QSBS problems are not visible on a cap table. They show up when someone reviews the company’s history the way an IRS examiner would.

• The business falls within, or drifted into, an excluded field.
• The company redeemed stock from you or other shareholders in a window that taints new issuances.
• Cash, investments, or other non-business assets were too large a share of the company’s assets.
• Gross assets exceeded the limit when your shares were issued.
• The company started as an LLC or S corporation, and the conversion was handled in a way that limits the benefit.
• Stock was bought from another shareholder, or acquired in a way that does not count as original issuance.
• There is no documentation proving the tests were met, years after the fact.

What the review covers

• Qualification analysis of each test, for each class and issuance of stock you hold.
• Documentation: a file of the corporate records, financial statements, and representations that support the exclusion.
• Exclusion estimate: the likely per-company cap and excluded gain for you and other holders you designate.
• Planning before signing: whether gifts to family members or trusts could multiply the cap, and the timing they require.
• Rollover options: whether a section 1045 rollover into new QSBS could defer gain on stock held too briefly.
• State tax: California does not follow the federal QSBS exclusion, so California residents may owe full state tax on the gain.

California and QSBS

California taxes QSBS gain in full, at rates up to 13.3%. For a California founder, the federal exclusion and the state bill can point in very different directions.

That is why many founders consider residency before a liquidity event. A move has to be genuine and well documented to hold up, and our Residency Audit Risk Assessment addresses that side of the plan.

If the IRS questions your exclusion

A large section 1202 exclusion is the kind of position the IRS examines. The burden is generally on you to show that every requirement was met, often years after the stock was issued.

The documentation built in a pre-sale review is the record you will need. If an examination comes, we represent clients through audit, appeals, and the U.S. Tax Court.

How the review works

1. Privileged consultation. We discuss your holdings, the company, and your timeline, under attorney-client privilege.
2. Records review. We review formation documents, stock issuances, financial statements, redemptions, and the cap table.
3. Analysis. We test each requirement and estimate your exclusion.
4. Recommendations. We identify gaps, documentation to gather, and planning to complete before signing.
5. Coordination. We work with your deal counsel and CPA so the sale and the return reflect the analysis.

Why clients choose Kugelman Law

An examiner’s view of the exclusion. Otto Bosch is a former IRS Revenue Agent from the Global High Wealth group of the IRS Large Business & International Division. He tests QSBS claims the way an examiner would.

California and residency experience. Founder Alex Kugelman was quoted in the Financial Times and the New York Post in July 2026 on California’s proposed billionaire tax and residency audits of departing residents.

Tax Court experience. Alex is a former judicial law clerk at the U.S. Tax Court, and both attorneys are admitted to practice before the U.S. Tax Court.

Related guides

• Qualified small business stock (QSBS): the complete guide to section 1202
• 2025 QSBS changes: the new section 1202 rules explained
• QSBS eligibility: the section 1202 tests
• QSBS audit: defending a section 1202 exclusion
• California QSBS: why the state won’t match the federal break
• QSBS for crypto startups

Frequently asked questions

What is a QSBS Pre-Sale Review?

It is a legal review, before a sale, of whether your stock qualifies for the section 1202 exclusion. It tests each requirement, documents the result, estimates the exclusion, and identifies planning that must be done before signing.

When should I get a QSBS review?

Ideally one to five years before a liquidity event, and no later than when a letter of intent arrives. Some planning, such as gifts to family members or trusts, generally must happen before there is a binding agreement to sell.

Does my company qualify for QSBS?

Only if it is a domestic C corporation that met the gross assets test when your stock was issued, used at least 80% of its assets in a qualified business, and is not in an excluded field. Each test has details that are easy to miss, so it should be confirmed with the company’s records.

Does California follow the QSBS exclusion?

No. California does not conform to section 1202, so California residents generally pay full state tax on QSBS gain. Residency at the time of sale can therefore matter a great deal.

What if I have held my stock less than the required period?

For stock issued after July 4, 2025, a partial exclusion may be available after three or four years. A section 1045 rollover into other qualified small business stock may also defer gain in some cases.

Can the IRS challenge my QSBS exclusion?

Yes. Large exclusions draw scrutiny, and the burden is generally on you to prove each requirement. A documented pre-sale review builds the record you will need.

What does a consultation cost?

We offer paid consultations fully protected by attorney-client privilege; we do not offer free consultations. A paid consultation gives you a real analysis of your stock and your options. Call (415) 968-1780 to schedule.

About our attorneys

Otto Bosch is a tax controversy attorney at Kugelman Law and a former IRS Revenue Agent from the Global High Wealth group of the IRS Large Business & International (LB&I) Division. He is admitted to practice before the U.S. Tax Court and in Missouri, is an IRS Enrolled Agent, and holds an LL.M. in Taxation.

Otto was quoted in Tax Notes in 2026 on IRS examination training and the LB&I audit campaign targeting deferred legal fee structures. His practice focuses on IRS audit defense, high-net-worth examinations, and U.S. Tax Court litigation.

Alex Kugelman is the founder and managing attorney of Kugelman Law and a former judicial law clerk at the U.S. Tax Court, with nearly two decades of federal tax controversy experience. He was quoted in the Financial Times and the New York Post in July 2026 on California’s proposed billionaire tax and residency audits.

Review your QSBS position before you sign

If a sale is on the horizon, the time to confirm your exclusion is now, while there is still room to plan.

Schedule a paid, privileged consultation by calling (415) 968-1780 or visiting our contact page.

This page is attorney advertising and general information, not legal advice. QSBS eligibility depends on the specific company, stock, and holder, and on current federal and state law. Contacting Kugelman Law does not create an attorney-client relationship.