Background
Qualified Small Business Stock (“QSBS”) under Section 1202 of the Internal Revenue Code provides a powerful tax incentive to investors, founders and employees of start-ups and qualified small businesses. In 2025, under the One Big Beautiful Bill Act, QSBS tax benefits were significantly expanded. For QSBS issued after July 4, 2025, the asset threshold for qualifying corporations increased from $50 million to $75 million (with inflation adjustments beginning in 2027), the per-issuer gain exclusion cap rose from $10 million to $15 million (also inflation-adjusted from 2027), and the holding period requirements became tiered rather than a five-year cliff. Taxpayers can exclude 50% of gains after three years, 75% after four years, and 100% after five years of holding QSBS. Given the potential benefits associated with qualifying for the gain exclusion, it is important for taxpayers to substantiate and document their position through third party attestation.
Eligibility Requirements
For stock to qualify as QSBS, multiple requirements must be met. The company: (i) must be a domestic C corporation or LLC electing C-corporation status; (ii) has gross assets not exceeding $50 million (for stocks issued prior to July 4, 2025) or $75 million (for stocks issued after July 4, 2025) at all times before and immediately after the stock issuances; (iii) used at least 80% of assets in active business operations; and (iv) must engage in a qualified trade or business. Further, QSBS: (a) must be acquired directly from the company at original issuance; (b) must be issued in exchange for cash, property or services; (c) must be held for the required timeframe (e.g., 3 to 5 years depending on desired exclusion percentage); and (d) the stockholder must be a non-corporate taxpayer (e.g., individuals, trusts and partnerships).
Third Party Attestation
A QSBS “attestation letter” confirms that the QSBS Issuer-level eligibility requirements are satisfied as of the date of the attestation. The attestation letter will help substantiate a stockholder’s eligibility for Section 1202 tax benefits when selling its shares and can provide support in case of an audit.
An effective attestation letter should address the following elements with specificity: (a) corporate status verification (i.e., the company is and has been a domestic C corporation during the relevant periods); (b) gross assets confirmation (i.e., the company’s gross assets did not exceed the applicable threshold); (c) active business requirements (i.e., at least 80% of the company’s assets have been used in the active conduct of one or more qualified trades or businesses during substantially all of the stockholder’s holding period); (d) stock issuance details (i.e., confirmation that the shares were issued directly by the corporation for money, property (other than stock) or as compensation for services); and (e) holding period verification (i.e., documentation supporting the length of time the shares have been held).
Attestation letters are generally issued by tax professionals or financial services companies. Attestation letters are also often provided periodically as part of a package of corporate and/or valuation related services, but some attestations are issued on a one-off basis, usually in connection with events such as stock issuances or a sale process, or periodically (typically annually) as part of a package of corporate and/or valuation related services.
Issuance of Attestation Letter; Maintaining Ongoing Compliance
Generally, the best time to obtain an attestation is when there is an event occurring where it is meaningful to confirm that the QSBS Issuer remains a “qualified small business” or a taxpayer’s stock qualifies as QSBS. For example, obtaining an attestation prior to the issuance of equity compensation, a capital raise from investors or commencement of an M&A process might contribute meaningfully to the planning process.
Angel and venture capital investors often require companies to maintain QSBS eligibility and provide documentation. Thus, it is important to understand that QSBS eligibility is not a one-time determination and ongoing monitoring of QSBS status should maintained. For example, among other things, share repurchases exceeding certain thresholds may disqualify shares issued one year before and after the buyback and business model changes into non-qualifying activities may affect QSBS status. Given these potential pitfalls, annual QSBS attestation reviews are recommended to ensure continued eligibility and provide stockholders with up-to-date documentation.
We are providing this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal or tax advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional and tax advisers.
Barry Carus is a partner and JiaJun Shan is an associate in our Corporate/Securities Practice Group. They can be reached at BCarus@certilmanbalin.com and JShan@certilmanbalin.com.
