QSBS Valuation

Section 1202

Independent Valuations to Support the $50M/$75M Gross Assets Test – Including §351 Contributions and Post-OBBBA Issuances

Qualified Small Business Stock (QSBS) under Section 1202 can provide significant tax benefits to eligible shareholders.

A key requirement is that the company’s gross assets do not exceed the applicable threshold ($50M for stock issued on or before July 4, 2025; $75M for stock issued after the enactment of OBBBA) at the relevant measurement date. The test is based on the aggregate adjusted tax basis of the corporation’s assets, not book value, and not a pure fair market value test. The critical exception: property contributed to the corporation is treated as having a basis equal to its fair market value on the contribution date (§1202(d)(2)(B)).

Complete Advisors provides independent valuation support to help quantify gross assets and support documentation for this test.

We work with CPAs, corporate attorneys, and estate advisors, providing valuation work product that supports their tax and legal analysis.

What is QSBS? (Section 1202 Explained)

QSBS allows eligible shareholders to exclude a portion, up to 100%, subject to per-issuer caps and holding period, of capital gains on qualified stock, subject to statutory requirements.

Eligibility depends on several conditions, including:

  • Issuance by a U.S. C-corporation
  • Active business requirements
  • A minimum holding period (generally five years)
  • Gross assets not exceeding $50M / $75M (under OBBBA) at the time of issuance
  • Original issuance of stock

We focus specifically on the valuation components of QSBS and do not provide legal or tax advice.

Recent Developments: One Big Beautiful Bill Act (OBBBA, 2025)

OBBBA, signed July 4, 2025, made several significant changes to §1202:

  • Threshold increase: $50M for stock issued on or before July 4, 2025; $75M for stock issued after. The $75M figure is indexed for inflation beginning in 2027.
  • Tiered holding period (post-OBBBA stock only): 50% exclusion at 3 years, 75% at 4 years, 100% at 5 years, replacing the prior 5-year cliff.
  • Per-issuer gain exclusion cap: Raised from $10M to $15M (indexed for inflation starting 2027).
  • No reset via reorganizations: Pre-OBBBA stock cannot be restructured into post-OBBBA treatment.

Role of Valuation in QSBS Eligibility

QSBS eligibility is frequently influenced by how a company’s assets are measured and documented.

Gross Assets Test

The gross assets threshold is measured using the corporation’s aggregate adjusted tax basis in its assets, plus cash, not book value, and not a general FMV test. The threshold is $50M for stock issued on or before July 4, 2025; $75M for stock issued after (under OBBBA).

Assets included in the test:

  • Cash plus the adjusted basis of other property held by the corporation
  • Contributed property (measured at FMV at the contribution date per §1202(d)(2)(B))
  • Intangible assets such as intellectual property and goodwill

Important: Post-contribution appreciation does not push a company over the threshold. It is the FMV-substituted basis of contributed property, not ongoing FMV, that drives the analysis for those assets.

Measurement Date

The gross assets test is typically evaluated:

  • At stock issuance
  • At conversion or capital event dates

Critical “never exceeded” rule: The test applies at all times from August 10, 1993, through immediately after the stock issuance. A single historical breach is permanently disqualifying, even if gross assets subsequently dropped below the threshold. Aligning the valuation with the correct measurement date and documenting the full testing period is essential.

Valuation of Contributed Property & Intangibles

Assets contributed to the business are measured at fair market value at the contribution date, not at adjusted tax basis or book value. This FMV-substitution rule is the primary point at which independent valuation support becomes essential.

This often applies to:

  • Intellectual property and self-created intangibles contributed under §351
  • Real estate or operating assets contributed at incorporation
  • Goodwill or other appreciated property transferred into a C-corp

Our QSBS Valuation Approach

Complete Advisors provide focused valuation support for QSBS-related requirements.

Our work typically includes:

  • Identification of relevant assets for the gross assets test
  • Determination of adjusted tax basis and FMV for contributed assets
  • Alignment of valuation with the appropriate measurement date
  • Development of supporting schedules and gross asset basis documentation
  • Preparation of work product suitable for advisor and IRS review

We provide valuation analyses that can be used by your tax and legal advisors in forming their conclusions.

    When QSBS Valuation Support Is Needed

    QSBS valuation support is typically required in the following situations:

    • Stock issuances
    • Equity financings
    • SAFE or convertible note conversions
    • Contribution of assets to the business (including §351 incorporations and capital contributions of IP, real estate, or operating assets)
    • Pre-incorporation FMV studies for partnerships or LLCs converting to C-corps
    • At-issuance gross asset basis schedules with FMV substitution for contributed property
    • Look-back/retrospective valuations to support QSBS positions on prior stock issuances
    • Section 1045 rollover support
    • Companies approaching the $50M / $75M threshold
    • Audit and IRS examination support

      Valuation Drivers That Affect the $50M/$75M Test

      Key valuation considerations include:

      • Fair market value of contributed assets at the contribution date
      • Valuation of internally developed intangible assets and self-created IP
      • Identification of all relevant assets included in the test
      • Selection of the appropriate measurement date
      • Consistency and support of the valuation assumptions

        Why Complete Advisors

        Deep Technical Expertise in QSBS & §351 Valuations

        • Proven Mastery of §1202(d)(2)(B): Direct experience navigating the complex “fair market value substitution” rules for contributed property.
        • Complex Asset Appraisals: Advanced utilization of income, market, and cost approaches to value self-created IP and goodwill during §351 incorporations.
        • Partnership-to-C-Corp Conversions: Specialized expertise in handling pre-incorporation studies to safely establish QSBS status during entity transitions.
        • Strategic Collaboration: Seamless coordination with tax counsel to support optimal §351 contribution structuring.

        Resolving Your Most Challenging Valuation Hurdles

        • Intangible Asset Valuation: We specialize in valuing self-created intangible assets—frequently the most technically challenging and heavily scrutinized component of a QSBS study.
        • Audit-Ready Deliverables: Comprehensive, highly defensible documentation designed for immediate advisor use and robust IRS examination support.
        • Credentials You Can Trust: Engagements are led by CFA® and CVA® certified professionals who focus exclusively on complex, judgment-intensive valuations.
        • Nationwide Reputation: Trusted by CPAs, corporate attorneys, and wealth advisors across the country for high-stakes valuation work.

        Typical Engagement Profile

        • Focus Area: Our typical engagements involve entities with $3M to $75M in contributed asset value or gross asset thresholds.
          Frequently Asked Questions
          Is the QSBS gross assets test based on book value or fair market value?

          The test is based on the corporation’s adjusted tax basis in its assets, with one important exception: property contributed to the corporation is measured at its fair market value as of the contribution date.

          2. Is the QSBS gross assets test based on book value or fair market value?

          Neither. The test is based on the corporation’s aggregate adjusted tax basis in its assets, with one important exception: property contributed to the corporation is measured at its fair market value as of the contribution date (§1202(d)(2)(B)). This FMV-substitution rule is where independent valuation support is most relevant.

          3. Has the $50M threshold changed under OBBBA?

          Yes. The One Big Beautiful Bill Act (signed July 4, 2025) raised the threshold to $75M for stock issued after that date. The $75M figure is indexed for inflation beginning in 2027. The original $50M threshold continues to apply to all stock issued on or before July 4, 2025.

          4. What valuation date is used for QSBS purposes?

          Typically, at stock issuance or at specific capital events that trigger measurement. For contributed property, the relevant date is the contribution date. Because the test applies at all times through issuance, documenting the full testing period, not just the issuance date, is important.

          5. When does a partnership-to-C-corp conversion require a QSBS valuation?

          When a partnership or LLC converts to a C-corporation and contributes assets in connection with that conversion, those contributed assets are measured at FMV at the contribution date for gross assets test purposes. An independent valuation is typically required to support that FMV determination, particularly for IP, goodwill, or other intangibles.

          6. How are contributed assets and intangibles valued?

          At fair market value at the time of contribution, typically requiring an independent valuation analysis. For self-created intangibles such as internally developed IP, this is often the most technically complex component of the gross assets analysis.

          7. Do states recognize the QSBS exclusion?

          State treatment of the federal IRC §1202 exclusion varies. As of July 2026, California, Alabama, Mississippi, Pennsylvania, and Oregon generally do not recognize the federal QSBS exclusion. New Jersey recognizes the federal exclusion beginning with tax year 2026. Hawaii has partial conformity. Massachusetts generally recognizes the pre-2025 federal exclusion, including the 100% exclusion for qualifying sales or exchanges occurring on or after January 1, 2022, but has not automatically adopted the 2025 federal expansion. Maine also limits the expanded federal rules for QSBS acquired after July 4, 2025. The District of Columbia does not recognize the exclusion. Because state treatment may depend on the tax year, stock-acquisition date, taxpayer residency, gain sourcing, and transaction structure, taxpayers should confirm the applicable treatment with qualified state and local tax counsel.

          8. What documentation does the IRS expect to support the gross assets test?

          Detailed valuation reports, gross asset basis schedules, cap table, transaction history, and clearly documented assumptions aligned with applicable valuation standards (NACVA Professional Standards, and USPAP Standards 9 and 10 where applicable). Documentation should address the full testing period, the basis of FMV of contributed assets, and the methodology applied.

          Schedule a 20-Minute QSBS Eligibility Discussion

          This content is for informational purposes only and does not constitute tax or legal advice. Valuation conclusions are subject to applicable professional standards (USPAP / NACVA). Complete Advisors does not provide tax or legal opinions; QSBS qualification should be determined in consultation with qualified tax counsel.