Qualified Small Business Stock (鈥淨SBS鈥�)1 can be highly advantageous in private equity structures when the portfolio company鈥檚 stock is acquired at original issuance, the issuer is within the aggregate gross asset cap, and the active鈥慴usiness test is satisfied. Below is a concise playbook teams can operationalize from day one.
TL;DR
- Acquire portfolio company equity by original issuance directly from the issuer (not via a secondary).
- Confirm C鈥慶orp status and the aggregate gross asset cap at issuance.
- Document that at least 80% of assets by value are used in the active conduct of a qualified trade or business; include attribution of majority鈥憃wned subs.
- Hold more than five years and track by block.
- For funds, rely on 搂1202(g) pass鈥憈hrough: partners may claim their distributive share if they held their interest continuously from the partnership鈥檚 original issuance date through exit.
QSBS Requirements (Statutory)
- Original issuance. Stock must be acquired directly from the issuing C鈥慶orp in exchange for money, property (not stock), or services.2
- Qualified Small Business. Immediately before and after the issuance, the corporation鈥檚 aggregate gross assets must not exceed the statutory cap (generally $50M; $75M for stock issued after July 4, 2025).3
- Active business requirement. During substantially all of the holding period, at least 80% (by value) of the company鈥檚 assets must be used in the active conduct of a qualified trade or business.4
- Subsidiary attribution rule. If the issuer controls a subsidiary (more than 50% by vote or value), the subsidiary鈥檚 assets and activities are treated as those of the parent for the 80% test.5
Holding Period & Pass鈥慣hrough Mechanics
To qualify for the exclusion, the stock must be held for more than five years. For partnerships (including funds taxed as partnerships), 搂1202(g) permits partners to claim the exclusion for their distributive share of gain if the partnership acquired QSBS at original issuance and the partner held its interest continuously from that date through the disposition of the stock.
鈥淐atch鈥慤p Issuance鈥� in Multi鈥慍lose Funds
In a multi鈥慶lose fund, teams often start the QSBS clock with a nominal issuance and then complete a 鈥渃atch鈥憉p鈥� issuance at (or near) final close to align portfolio鈥慶ompany shares with outstanding fund units. Each issuance is a separate original issuance with its own acquisition date and five鈥憏ear clock. Late鈥慳dmitted LPs typically participate only with respect to units outstanding on the catch鈥憉p date and must hold continuously thereafter to benefit under 搂1202(g).
Implementation Checklist
- Board actions. Approve each stock issuance (including any catch鈥憉p) for qualifying consideration; record acquisition date(s).
- Asset鈥慶ap memo. Document aggregate gross assets immediately before and after each issuance; retain schedules supporting 搂1202(d).
- Active鈥慴usiness tracking. Maintain records showing satisfaction of the 80% test during substantially all of the holding period; include majority鈥憃wned subs under the attribution rule.
- Cap table & LP ledger. Track QSBS by block, link partner pro鈥憆ata fractions to acquisition dates, and flag transfers that would break continuous ownership.
