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ARTICLE · 21 OCTOBER 2026

Navigating The QSBS Rules In Pass-Through Structures

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Partner Lauren Azebu examines the qualified small business stock (QSBS) gain exclusion rules under Section 1202, exploring the complexities that arise when QSBS is held through pass-through entities. The article analyzes technical issues including ownership limitations, transfer restrictions, and entity conversion strategies, while highlighting areas where guidance remains limited and emphasizing the importance of proactive planning.

United StatesTax
Lauren Azebu
Lauren Azebu

Eligible shareholders that sell qualified small business stock (QSBS) and meet certain requirements can permanently exclude gain from the sale of the stock from their federal taxable income.1 Congress enacted the special rules for QSBS in 1993 to incentivize investments in small, growth–oriented businesses.2 Interest in QSBS grew after the 2017 Tax Cuts and Jobs Act reduced the federal corporate income tax rate from 35% to 21%, making it more attractive for taxpayers to organize their businesses as C corporations for tax purposes, especially if the corporate stock could qualify for QSBS treatment.3 The law known as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119–21, further expanded benefits for QSBS acquired after July 4, 2025, by introducing a new tiered exclusion system with reduced holding periods and increasing certain per–issuer limitation amounts.4

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