Here's What Founders Should Do With QSBS
The 2026 midterm elections are quickly approaching, making it the perfect time to think about how the results might affect your business. During election season, members of every party are having conversations about tax issues, from creating new credits to reducing the number of exemptions available to taxpayers. As the founder of a CPG brand, you need to be aware of potential changes when you engage in QSBS tax planning.
At some point, legislators might even improve the qualified small business stock (QSBS) exclusion. This would be a huge benefit for CPG founders, as it would effectively remove federal capital gains tax on qualified gains from selling small business stock.
It's not clear if or when legislators will adjust the exclusion, but that doesn't mean you should ignore the issue. Start working on QSBS tax planning today to ensure you can take advantage of any changes that occur in 2026 and beyond. In this article, I'll cover the basics of QSBS, explain how it applies to CPG founders, and provide a forward-looking checklist based on my experience in the industry.
What Is QSBS, and Why Should Founders Care?
Under Section 1202 of the Internal Revenue Code, qualified small business stock is a special type of stock that lets you avoid capital gains tax on some or all of your qualified gains when you sell. Legislators introduced this exclusion as an incentive for Americans to start and grow small businesses.
If you're eligible for the QSBS exclusion, you may be able to exclude up to 100% of the capital gains associated with selling your company's stock. Here's how to qualify:
Company structure. Your company must be organized as a C-corporation, not a sole proprietorship, a limited liability company, an S-corporation, or a non-operating holding company.
Gross assets. The company's gross assets must total less than $50 million before and immediately after selling a stock.
Acquisition method. You must buy the stock from your company. "Buying" refers to exchanging cash, property, or services. Stock purchased from another investor doesn't usually qualify, but there are some exceptions for inherited and gifted stock.
Holding period. You must hold the stock for at least 5 years before selling.
Section 1202 also excludes certain industries, such as hotels, restaurants, banking, and leasing. The good news is that the CPG industry isn't on the list of exclusions. In other words, food and beverage companies can qualify.
The QSBS 1202 exclusion applies to the greater of: 10 times your adjusted basis in the stock or $10 million total gain (per issuer, per lifetime). This can lead to millions in tax savings — but only if you structure your brand correctly from the beginning.
During my career, I've seen several brands miss out on massive savings due to poor planning, so I highly recommend working with an experienced advisor. Selling your CPG business might not be a priority right now, but planning your tax strategy early can save you a lot of money later.
What Might Be Changing and Why It Matters
Recently, developing an effective tax strategy for CPG founders has been difficult, as legislators have proposed several changes to the Section 1202 exclusion. For example, an early draft of the Build Back Better Act of 2021 included a reduction from 100% to 50%. However, this change didn't make it into the Inflation Reduction Act (IRA).
The IRA implemented a 15% corporate alternative minimum tax (CAMT) for some large corporations, but it had a limited effect on QSBS savings. CAMT only applies to corporations with adjusted financial statement income exceeding $1 billion, so very few CPG founders had to worry about missing out on the exclusion.
Now, CPG founders, CPAs, tax preparers, and other interested parties are waiting to see if the QSBS exclusion will provide additional benefits under the One Big Beautiful Bill (OBBB) passed on July 4, 2025.
Here's how the OBBB could affect founder tax benefits in the coming years:
Holding period. The OBBB allows you to take a partial exclusion after 3 years, providing more flexibility. If it makes financial sense, you can opt for the partial exclusion after 3 or 4 years instead of waiting the full 5 years.
Exclusion percentages. If you sell after 3 years, you'll qualify for a 50% exclusion (assuming you meet all the other requirements). Selling after 4 years may make you eligible for a 75% exclusion.
Gross assets. The OBBB increases the asset threshold from $50 million to $75 million.
Potential tax savings. Under the OBBB, you can apply the exclusion to a total gain of $15 million instead of $15 million.
Inherited stock. The OBBB allows heirs to maintain the original holding period of qualified small business stock.
Industry expansion. Alcohol production now has clearer guidance when it's structured as domestic manufacturing. The OBBB also includes more CPG, food, agriculture, and tech-enabled businesses.
Even if you only take a 50% exclusion, the tax savings can be substantial, so it's important to plan ahead. No one knows what's going to happen after the midterm elections, but doing your QSBS tax planning now ensures you're prepared for future changes.
How to Structure for QSBS Even If You're Not Planning to Sell Yet
Depending on the stage of your business, selling may be the furthest thing from your mind. However, there are things you can do now to improve your chances of being able to take advantage of the QSBS exclusion later. Here's what I recommend:
Make sure your business is incorporated as a C-corp, not an S-corp.
Document your equity properly.
Monitor your balance sheet to ensure you don't exceed the asset threshold before or immediately after a sale.
Confirm that you're issuing qualified stock.
If you structure your business correctly, early employees and angel investors can also save a significant amount of money on capital gains taxes when selling their QSBS. Note that you may need additional legal support if you converted an LLC into a C-corporation.
What to Do Now, No Matter What Happens
If you're ready to get started, I highly recommend finding a start-up-savvy tax advisor with plenty of experience in helping founders qualify for QSBS exclusions. A good advisor can help you with several aspects of finance and operations, ensuring your business has a strong foundation.
To confirm what type of entity you have, consult your incorporation documents or schedule a call with your company's attorney. You can also check with the Secretary of State where you started your business. Many states have online search tools, making it easier to find the information.
Documenting your stock is essential for preserving your eligibility for the QSBS exclusion. Ideally, you should have an attorney draft a founder stock purchase agreement (FSPA), which lists the number of shares you're purchasing and their price per share. Your FSPA should also include details about vesting and restrictions.
Modeling a Potential Exit
To model a potential exit based on your current structure, make sure your business meets the QSBS exclusion requirements. You'll need to review your balance sheet to ensure you aren't over the asset threshold. It's also important to confirm that you'll meet the minimum holding period by the time you plan to exit.
You can estimate the future value of your exit by multiplying your forecasted revenue by a revenue multiplier. For example, if your company currently has $2 million in revenue, you can use a 5X multiplier to estimate $10 million in revenue when you're ready to exit.
Assuming you own 45% of the company, when you're ready to sell, your gross proceeds would be $4.5 million ($10 million in revenue x 45%).
The goal is here to protect your upside, not to time the market. Modeling a potential exit is about future optionality.
Determining the Effects of the QSBS Exclusion
When planning your exit, it's important to think about how the QSBS exclusion is likely to affect your tax situation. It's common for founders to receive stock in exchange for services, or to pay only a nominal amount for each share. If this applies to your situation, 10 times your basis might not add up to much money, so you'll have to stay under the $10 million (or $15 million if the OBBB is implemented as written) lifetime cap.
If this is your first sale of qualified business stock, then $4.5 million is well under the limit. However, for serial entrepreneurs, the cap might make it difficult to take the full exclusion.
Hope for the Best, Plan Either Way
The QSBS exclusion isn't a tax loophole; it's part of a smart strategy for building your wealth as the founder of a CPG brand. Exits are built over years, not months, so it's important to be strategic. A solid tax planning strategy is more important than luck in this situation.
Balanced Business Group is committed to helping founders gain control and clarity over their businesses. Contact us for support with equity structuring, tax planning strategy, or coordination with your legal and financial partners.
