QSBS Rules for Delaware C-Corps: Lifetime $10 Million Exclusion

Introduction

One of the greatest tax advantages available to founders and early investors in Delaware C-Corps is the Qualified Small Business Stock (QSBS) exclusion under Internal Revenue Code (IRC) §1202.
This powerful rule allows eligible shareholders to exclude up to $10 million of capital gains from federal tax when selling qualified stock.
In 2025, as AI and tech startups continue to grow, understanding the QSBS rules for Delaware C-Corps is essential for maximizing tax-free exit opportunities.

Step 1: What is Qualified Small Business Stock (QSBS)

QSBS refers to shares issued by a domestic C-Corporation that meets specific requirements under IRC §1202(b).
When certain conditions are met, capital gains from the sale of this stock can be excluded from federal taxation.

Key benefits:

• Up to 100 percent exclusion of capital gains.
• Lifetime cap of $10 million per taxpayer, or 10 times the original investment, whichever is greater.
• Applies to both founders and investors who acquire original issued stock.

Step 2: Basic QSBS Eligibility Requirements

To qualify for the QSBS exclusion, all of the following must be met:

1. Type of Entity: The company must be a C-Corporation.
2. Issuance: The stock must be originally issued to the investor (not purchased from another shareholder).
3. Holding Period: The stock must be held for at least five years.
4. Gross Assets: At issuance, the corporation must have less than $50 million in total gross assets.
5. Active Business Requirement: At least 80 percent of the company’s assets must be used in the active conduct of a qualified business.

Step 3: Which Businesses Qualify

Most AI, software, and technology companies incorporated in Delaware qualify, but the IRS excludes certain industries under IRC §1202(e)(3), such as:

• Finance and banking.
• Consulting, accounting, or law firms.
• Hospitality and restaurant businesses.
• Farming and extractive industries.

Example:
A Delaware AI startup engaged in developing machine learning software qualifies for QSBS.
However, a financial advisory business offering investment services does not.

Step 4: The $10 Million Lifetime Exclusion

Under IRC §1202(b)(1), eligible shareholders can exclude up to $10 million in gains per taxpayer, per issuer.

Example:
If a founder invests $100,000 in a Delaware C-Corp and later sells their stock for $10.5 million after five years, the first $10 million of gain is fully exempt from federal tax.
The remaining $500,000 is taxable as a capital gain.

Step 5: Timing and Holding Period

The five-year holding period begins on the date the stock is issued.
However, IRC §1045 allows investors to roll over QSBS gains into another qualified stock if sold before five years, deferring taxes.

Example:
If a Delaware C-Corp founder sells QSBS after three years, reinvesting proceeds into another qualified C-Corp within 60 days defers the gain.

Step 6: Delaware Corporate Requirements

To preserve QSBS eligibility, a Delaware C-Corp must:

1. Maintain C-Corp status continuously until the stock sale.
2. File annual Delaware franchise tax reports and remain in good standing.
3. Ensure corporate bylaws and share issuances comply with the Delaware General Corporation Law (DGCL).
4. Keep accurate records of authorized shares and stockholder information.

Step 7: Recordkeeping and Compliance

Both founders and investors should maintain:

• Stock purchase agreements.
• Board resolutions authorizing stock issuance.
• Certified copies of the Delaware Certificate of Incorporation.
• Proof of payment and stock certificates.
• Annual financial statements showing gross assets under $50 million.

Accurate recordkeeping is essential to prove QSBS eligibility during an IRS audit.

Step 8: Coordination with State Taxes

Delaware does not offer a separate QSBS exclusion at the state level.
However, Delaware-based corporations benefit from low franchise tax rates and flexible governance laws that make QSBS administration straightforward.
Federal QSBS exclusion remains the most significant benefit for shareholders.

Step 9: Potential Disqualifiers to Avoid

Your stock may lose QSBS eligibility if:

• The corporation converts to an S-Corp before sale.
• The company redeems too much of its stock within two years of issuance.
• The business invests heavily in non-qualified assets, such as securities or real estate.

These actions violate IRC §1202(c)(3) and eliminate the exclusion.

Conclusion

The QSBS exclusion offers Delaware C-Corp founders and early investors one of the most valuable tax incentives under U.S. law.
By maintaining C-Corp status, staying under the $50 million asset limit, and holding stock for five years, founders can potentially realize millions in tax-free capital gains.
With proper documentation and strategic tax planning, Delaware corporations can fully leverage QSBS benefits in 2025.

Call to Action

For expert guidance on Delaware C-Corp QSBS eligibility, contact Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent authorized to practice before the IRS, and cross-border tax expert assisting founders and investors with federal and Delaware compliance.

Disclaimer

This article is for informational purposes only and should not be considered legal or tax advice. Always consult a CPA before structuring your Delaware C-Corp or selling QSBS-eligible stock.

Top 5 FAQs

1. How long must QSBS be held to qualify for exclusion?
   At least five years from the date of issuance.
2. What is the maximum QSBS exclusion?
   Up to $10 million in capital gains per taxpayer, per company.
3. Can preferred stock qualify for QSBS?
   Yes, if issued at original incorporation and meeting IRC §1202 criteria.
4. Do Delaware LLCs qualify for QSBS?
   No, only C-Corporations qualify under federal law.
5. Can QSBS gains be rolled over?
   Yes, under IRC §1045, gains can be rolled into another qualified stock within 60 days.

About Our CPA

Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the United States, Enrolled Agent admitted to practice before the IRS, and cross-border tax expert helping founders and investors with Delaware C-Corp formation, QSBS planning, and capital gain exemption strategies.