Sample QSBS attestation letter

[Law firm letterhead]
[Attorney name, title, direct dial, email]

[Date]

[Name], General Counsel
[Company legal name]
[Address]

Re: [Company] Qualified Small Business Status

Dear [Name]:

We are writing to provide an analysis related to the status of [Company] (the “Company”) as a qualified small business under Internal Revenue Code (“IRC”) section 1202(d) and the status of its shares as qualified small business stock (“QSBS”) under IRC section 1202(c).

Based on our review, we believe that the Company was a qualified small business and that shares issued from the inception of the Company until [cutoff date] appear to be QSBS within the meaning of IRC section 1202(c)(1). Shareholders with stock issued prior to that date may be able to exclude gain on the greater of $10,000,000 or ten times their basis on the sale of such shares, provided that a particular shareholder has held the shares for five years. [For any shares issued after July 4, 2025: state the $15,000,000 cap, the $75,000,000 gross asset limit, and the 3-, 4-, and 5-year exclusion percentages.]

We note that our advice is general in nature, and our conclusions may not apply to any particular taxpayer. Shareholders should consult with their own tax advisors regarding the tax treatment of their particular share holdings. Our conclusions assume the following statement of facts is true in all material respects.

Facts

The Company was formed as a [state] corporation on [formation date]. Headquartered in [city, state], the Company [description of products and services and how the Company generates revenue]. [If the business relies on regulated partners, such as banks, carriers, or processors, describe which functions the partners perform and which the Company performs.]

Based on the latest information and financial statements provided, the Company had assets below $50,000,000 as of [cutoff date] and in every period prior. [Describe any subsidiaries and any stock or securities held in other companies.] The Company has not engaged in any significant stock redemptions or repurchases.

The Company’s business has grown through the development of its intellectual property and product offerings. While most of the Company’s value resides in its developed products, business partnerships, and other proprietary intangibles, such assets are not reflected on its balance sheets, in accordance with financial accounting principles. Gross assets on the balance sheets totaled approximately [$ amount] as of the end of [year], [$ amount] as of the end of [year], and [continue for each year]. By contrast, the Company’s third-party 409A valuation reports valued the Company at approximately [$ amount] as of [date] [continue for each 409A report]. Additionally, the Company’s pre-money valuations valued the Company at approximately [$ amount] at the [round] financing on [date] [continue for each financing].

Analysis

In general, for stock to be QSBS, the shares must be stock of a C corporation, received at original issuance in exchange for property or as compensation for services, and the corporation must be a qualified small business. A qualified small business is one where, at the time of issuance, the aggregate gross assets of the corporation were not greater than $50,000,000. In addition, shares of a C corporation will only qualify as QSBS if, during substantially all of the taxpayer’s holding period for the stock, 80% of the assets of the corporation are used in the active conduct of one or more “qualified trades or businesses.”

A. Shares received at original issuance in a C corporation

In order for shares to be QSBS, the shares must have been received “at original issuance” from a C corporation. The Company was formed on [formation date] as a [state] C corporation and has filed as a C corporation from formation onward. It is possible that some shares received at original issuance have subsequently been sold or transferred to other individuals or entities. Depending on the circumstances of the transfers, such shares may have lost their QSBS character as a result. However, the original issuance prong would be satisfied for those shares received directly from the Company.

B. Redemptions

Certain redemptions may disqualify stock from treatment as QSBS. Specifically, stock may not qualify as QSBS if the corporation purchases stock from the shareholder or a person related to the shareholder at any time two years before or two years after the original issuance over a de minimis threshold (IRC section 1202(c)(3)(A); Treas. Reg. section 1.1202-2(a)). Stock acquired exceeds the de minimis amount when it is more than 2% by value of the redeemed party’s holdings and the purchase price exceeds $10,000. The corporation also may not engage in “significant” redemptions at any time one year before or one year after the issuance (IRC section 1202(c)(3)(B); Treas. Reg. section 1.1202-2(b)). A redemption is significant when the corporation purchases more than a de minimis amount of its stock and such amount exceeds 5% of the aggregate value of the stock at the beginning of such period. However, stock purchases are disregarded when the stock was acquired in connection with the performance of services as an employee or director and then redeemed on the termination of services (Treas. Reg. section 1.1202-2(d)).

[State whether any redemptions occurred, other than on separation of service, and whether any affect the issuances covered by this letter.]

C. Qualified small business: gross assets test

A corporation meets the qualified small business test as long as, at the time the shares are issued, the gross assets of the corporation were not more than $50,000,000 (IRC section 1202(d)). In calculating the $50,000,000, the amount of cash and the aggregate adjusted bases of other property held by the corporation cannot exceed $50,000,000. In the case of financing rounds, the threshold is tested by taking into account amounts received in the issuance (IRC section 1202(d)(1)(B)).

The aggregate gross assets of the Company appeared to be below $50,000,000 from inception through [cutoff date]. Shares issued prior to [first date after the cutoff] appear to meet the gross assets test. [If monthly balance sheets show the threshold was approached or crossed between financings, explain the position taken and the assets involved, such as receivables versus cash on hand.]

D. Active conduct of a qualified trade or business

For shares to be QSBS, 80% of the assets of the corporation must be used in the active conduct of one or more qualified trades or businesses during substantially all of the shareholder’s holding period (IRC sections 1202(c)(2) and 1202(e)(1)). Subsidiaries are included provided the parent owns more than 50% of them (IRC section 1202(e)(5)(A)). If more than 10% of the value of a corporation consists of stock or securities in other corporations, or real property not used in a qualified trade or business, the corporation fails the test (IRC sections 1202(e)(5)(B) and 1202(e)(7)).

1. Definition of qualified trade or business. The IRC defines a qualified trade or business by exclusion. Businesses involving the performance of services in fields including health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services, along with banking, insurance, financing, leasing, investing, farming, certain extraction businesses, and hotels and restaurants, or any trade or business where the principal asset is the reputation or skill of one or more of its employees, are excluded (IRC section 1202(e)(3)).

The IRS has provided guidance through private letter rulings, which can’t be cited as precedent but show how the agency reads the statute. PLR 201436001 concluded that a pharmaceutical company deploying manufacturing and intellectual property assets to create value for customers was a qualified business. PLR 201717010 reached a similar result for a company using patented technology to produce laboratory reports. PLR 202144026 concluded that a software company providing tools to healthcare providers was creating an asset for its customers rather than providing health services. PLR 202221006 treated a specialty drug distributor’s principal asset as its exclusive distribution rights, not the skill of its employees. [Apply this guidance to the Company’s business, explaining why its value comes from technology, intellectual property, or other assets rather than employees’ reputation or skill. Address any services that could resemble an excluded field, such as financial services.]

2. Stock and real estate ownership. [State the Company’s holdings of stock in other companies and real estate, and confirm that neither exceeds 10% of the value of its assets.]

3. Working capital. At least 80% of the Company’s assets by value must have been used in its qualified trade or business for substantially all of the holding period (IRC section 1202(e)). Assets held for reasonable working capital needs, or held for certain investments, are treated as used in the active conduct of a qualified trade or business during the first two years of the corporation’s existence (IRC section 1202(e)(6)). After that period, no more than 50% of the corporation’s assets by value may qualify under that category (IRC section 1202(e)(6)(B)). Working capital needs generally include amounts reasonably necessary for ordinary operating expenses during the current operating cycle, amounts needed for specific and definite expansion plans, and amounts for reasonably anticipated extraordinary expenses (Bardahl Mfg. Corp. v. Commissioner, T.C. Memo. 1965-200). Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, with third-party 409A valuations serving as evidence of value for a private company.

[Compare cash and current assets to 50% of the Company’s fair market value for each period after the first two years, and state whether any assets must be excluded. Reference the year-by-year exhibit.]

Conclusion

We hope this analysis of the Company’s status as a qualified small business and its shares as QSBS is helpful. However, please note that shareholders should consult their return preparers to consider the particular facts of their respective filing positions and whether their individual shares are QSBS.

Very truly yours,
[Signature, name, firm]

Exhibit A: 80% test by year