The California Qualified Small Business Stock (QSBS) Tax Exclusion: A Hidden Tax Break for Startup Owners

If you're a startup founder or small business owner in California, you might be sitting on one of the most powerful tax breaks available, and not even know it. The Qualified Small Business Stock (QSBS) exclusion can allow you to exclude up to 100% of capital gains from federal taxes when you eventually sell your business. This isn’t a loophole, it’s written directly into federal tax code. And as of 2025, the benefits have become even more generous.

While much of the tax world focuses on yearly deductions or expense strategies, the QSBS exclusion is a long term planning opportunity that rewards owners who build and eventually exit a successful business. It’s ideal for LLCs that convert to C-Corps, early stage startups, or even solo founders who intend to sell their companies within a few years.

What Is the QSBS Exclusion and How Does It Work?

The QSBS exclusion comes from Section 1202 of the Internal Revenue Code. If you meet the criteria, you can now sell shares in your company and exclude up to $15 million (or 10 times your basis) in capital gains from federal taxes. That’s a $5 million increase from the previous cap.

Thanks to the One Big Beautiful Bill (OBBB), the holding period requirement has also been reduced from 5 years to as little as 3 years, with tiered benefits:

• 3 years = 50% exclusion
• 4 years = 75% exclusion
• 5 years = 100% exclusion

The asset limit to qualify has also been raised from $50 million to $75 million, meaning more growing businesses can now take advantage of QSBS.

To qualify, the company must be a domestic C-Corporation, the stock must be original issuance (not purchased from another shareholder), and the company must meet certain active business and size requirements.



Important: These new benefits apply only to stock issued after July 4, 2025, so planning your structure and timing now is crucial.

Does California Still Offer This Exclusion? Not Exactly, but It’s Still Worth Pursuing

In 2013, California repealed its own conformity to the federal QSBS exclusion, which means that state capital gains taxes still apply, even if you qualify for the federal exemption. While this limits the total benefit, it doesn’t eliminate it. In fact, federal capital gains taxes are often the larger portion of the liability, especially for sizable exits. The misconception that “QSBS doesn’t work in California” causes many startup owners to overlook this tax saving strategy entirely.

This is where proper tax planning becomes critical. A business owner who structures their company correctly and understands QSBS eligibility may still save hundreds of thousands in federal taxes,  even if they’ll pay some state tax. At DRS Accounting PC, we help founders and business owners across California understand when and how to build a tax smart strategy around QSBS, and how to avoid disqualifying mistakes.

Why This Matters More Than Ever

If you’ve recently formed a startup, invested in a growing company, or plan to sell shares in the future, the 2025 changes make QSBS planning even more valuable. The shorter holding periods mean you can benefit sooner, and the higher caps give you more room to grow before hitting the limits.

However, eligibility hinges on when and how your stock is issued, how your company is structured, and what kind of business you run. Waiting until you’re ready to sell is too late; one wrong move, like converting out of C-Corp status or failing to track your holding period, can eliminate the benefit entirely.

Final Thoughts

Tax law isn’t always intuitive, and some of the most valuable opportunities are buried under layers of technical language. But the QSBS exclusion (especially under the new 2025 rules) is one of those rare breaks that can make a meaningful difference, if you know about it and plan early.

At DRS Accounting PC, we help small business owners and startup founders in California build tax strategies that prepare them for success, including exits. Schedule a free consultation if you’d like to know whether you qualify or need help planning the right structure.

There may be no shortcuts in business, but there are definitely smarter paths, and right now this is one of them.