QSBS After the 2025 Overhaul — and Why the Exclusion List Bites Harder Here
Section 1202 got its biggest expansion in fifteen years: a tiered holding period, a $15 million cap, and a $75 million asset test. But the list of businesses that cannot qualify maps uncomfortably well onto the Upper Midwest economy.
Northern Dealbook · August 7, 2026 · 9 min read
Qualified small business stock is the most valuable tax provision most founders have never read. Section 1202 can exclude the entire gain on a sale of startup stock from federal income tax — not defer it, exclude it — and in July 2025 it was expanded more substantially than at any point since 2010.
Two things about the overhaul matter for anyone building or funding a company in this region. The first is that the new rules are strictly better. The second is that they do nothing about § 1202’s oldest problem, which happens to be the one that most often disqualifies companies here.
What changed on July 4, 2025
The changes apply only to stock acquired after July 4, 2025. Stock issued on or before that date stays under the old rules permanently. This is the single most important sentence in this article: there is now a hard line running through cap tables, and shares issued a week apart can be governed by different regimes.
The holding period became tiered. Under the old rule, you got nothing until five years and then the full exclusion. Now, for stock acquired after the applicable date:
| Held | Gain excluded |
|---|---|
| 3 years | 50% |
| 4 years | 75% |
| 5+ years | 100% |
This is the change with the most practical bite. Under the prior regime, a founder receiving an acquisition offer at year four faced a genuinely distorting choice: take the deal and pay full freight, or try to stall a strategic buyer for twelve months. Now year four is worth 75 percent, and the cliff has become a ramp.
The cap rose. The per-issuer limitation is the greater of the applicable dollar limit or 10 times the aggregate adjusted bases of the stock disposed of. That dollar limit moved from $10,000,000 to $15,000,000 for stock acquired after the applicable date, with an inflation adjustment for taxable years beginning after 2026.
The 10x-basis alternative is unchanged and remains underappreciated. An investor who put in $3 million has a 10x limit of $30 million, well above the dollar cap. For anyone writing real checks, basis is usually the governing number, not the headline figure.
The size test rose. The aggregate gross assets ceiling went from $50,000,000 to $75,000,000, tested both before and immediately after issuance.
Why the size increase matters less here than the headlines suggest
Most commentary on the $75 million threshold has been written for a coastal audience, where companies raise large rounds early and can approach $50 million in gross assets before a Series B closes. In that world, the old ceiling was a live constraint that silently disqualified later rounds.
In Minnesota, Wisconsin, and the Dakotas, rounds are smaller and the ceiling was rarely the binding constraint. A company here is far more likely to be disqualified by what it does than by how big it got.
The exclusion list is the regional problem
To qualify, the issuer must be engaged in a qualified trade or business, and § 1202 defines that in the negative. Excluded are:
- Businesses performing services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, and financial or brokerage services
- Banking, insurance, financing, leasing, investing, and similar businesses
- Farming, including the raising or harvesting of trees
- Businesses involving oil, gas, or mineral extraction
- Hotels, motels, restaurants, and similar businesses
Read that list against the industrial base of this region and the problem is obvious. Minneapolis is a banking and insurance center. Agriculture is the economic foundation of both Dakotas and a large share of greater Minnesota and Wisconsin. Oil and gas is the Bakken. Health services are everywhere.
A founder in Palo Alto building software is almost automatically in a qualified trade or business. A founder in Fargo may well be building something that touches agriculture, or energy, or banking — and the analysis becomes real work rather than a formality.
The distinction that saves Minnesota medtech
Here is where the exclusion is narrower than it first appears, and it matters enormously to the state’s signature industry.
The exclusion is for businesses performing services in health. It is not an exclusion for companies in the health industry. A company that manufactures a medical device is engaged in manufacturing. A company that operates a clinic and bills for care is performing services in health.
That line is why a great deal of Minnesota medtech sits comfortably inside § 1202 while a physician practice roll-up does not. It is also why the analysis has to be done on what the company actually does for money, not on which conference it exhibits at. A digital health company whose revenue comes from licensing software is in a different position from one whose revenue comes from clinicians delivering care through an app — and those two businesses often describe themselves identically in a pitch deck.
Similar reasoning applies to agriculture. Farming is excluded. A company manufacturing agricultural equipment, or writing software sold to farmers, is not farming.
What to actually do
Document qualification at issuance, not at exit. The gross assets test is measured before and immediately after the stock is issued. That fact is provable on the day and nearly impossible to reconstruct cleanly seven years later during diligence on a sale. Ask for a § 1202 representation and keep the balance sheet.
Know which side of July 4, 2025 your shares fall on. Stock issued before that date keeps the old rules — $10 million cap, $50 million asset test, all or nothing at five years. Founders with pre-2025 stock and investors from a 2026 round are on different regimes in the same company. Anyone modeling an exit needs to segment the cap table accordingly.
Do not assume a conversion or exchange preserves the date. How a share issued in a later transaction relates back to the original acquisition is technical, and it is exactly the kind of question that should be answered before a recapitalization rather than after.
If you are in an excluded field, ask whether you actually are. The line between performing services and selling a product is where most of the real analysis lives, and it is frequently winnable.
A closing caution
Section 1202 has a long history of being described confidently and applied incorrectly. It has interlocking tests — original issuance, C corporation status, the active business requirement, the gross assets ceiling, the holding period, and the per-issuer cap — and failing any one of them costs the entire benefit. Nothing above is a substitute for running the analysis against your facts with a tax adviser who has done it before.
Sources
- 26 U.S.C. § 1202, current text — law.cornell.edu (retrieved August 7, 2026). Tiered exclusion percentages of 50, 75, and 100 percent at three, four, and five years for stock acquired after the applicable date; the $10,000,000 and $15,000,000 per-issuer dollar limits and the 10x adjusted basis alternative; the inflation adjustment for taxable years beginning after 2026; the $75,000,000 aggregate gross assets test; and the enumerated excluded trades or businesses.
- The July 4, 2025 applicable date and the prospective-only application of the amendments were confirmed against contemporaneous analyses of the One Big Beautiful Bill Act published by Holland & Knight and Baker Tilly (retrieved August 7, 2026).
Nothing here is legal or tax advice. Section 1202 is fact-intensive and its tests are conjunctive; confirm your own position with a qualified adviser before relying on any of it.
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