Many government contractors assume they do not qualify for the Qualified Small Business Stock (QSBS) (Opens a new window) exclusion under Section 1202.

That assumption may be costing founders, shareholders, and investors millions of dollars.

QSBS can allow eligible shareholders to exclude up to $15 million of gain from federal income tax upon the sale of qualifying stock. Recent legislative changes have expanded the benefit and made it more accessible to growing businesses.

The surprising part? Government contractors are not automatically excluded.

What Is QSBS?

Qualified Small Business Stock (QSBS) is stock that meets the requirements of Section 1202 of the Internal Revenue Code. When those requirements are satisfied, non-corporate shareholders may exclude a significant portion of the gain recognized on the sale of qualifying stock.

Recent changes under the One Big Beautiful Bill Act (OBBB) made the benefit even more valuable. For stock acquired after July 4, 2025, the exclusion is now based on holding period:

• • 50% exclusion after three years
  • 75% exclusion after four years
  • 100% exclusion after five years

The legislation also increased the per-issuer gain exclusion limitation to $15 million and raised the gross asset threshold for qualifying companies to $75 million, with inflation adjustments beginning in 2027.

For a more detailed discussion of QSBS requirements, planning opportunities, and recent legislative changes, see our companion article, The Qualified Small Business Stock Exclusion: A Rare Gift. (Opens a new window)

It's not about who you sell to

One of the most common misconceptions is that doing business with the federal government disqualifies a company from QSBS.

Section 1202 does not ask who your customers are. It asks what creates the value of your business.

A company that develops proprietary software, cybersecurity tools, platforms, products, data solutions, or other intellectual property may have a significantly stronger QSBS position than a company whose value is primarily derived from labor-based services.

In other words, a GovCon company's eligibility often depends less on its customer base and more on how the business creates, owns, and commercializes its technology or products.

The real question: Does your company qualify?

Every company is different, and QSBS qualification is highly fact-specific.

Among other requirements, companies must satisfy rules relating to:

• • Corporate structure
  • Gross assets
  • Holding periods
  • Active business operations
  • The nature of the company's trade or business

For government contractors, the most important analysis often centers on whether the company's value is driven primarily by technology, products, intellectual property, and other business assets rather than the skill and reputation of its workforce alone.

Why planning matters

The QSBS analysis is often performed years after stock is issued and shortly before a transaction closes.

By then, it may be difficult to reconstruct key facts regarding:

• • Intellectual property ownership (Opens a new window)
  • Contract terms and data rights
  • Revenue streams
  • Research and development activities (Opens a new window)
  • Asset utilization

Companies that evaluate these issues early are generally in a better position to support a favorable QSBS analysis when an exit opportunity arises.

How we help

We work with government contractors, founders, and investors to evaluate whether their business may qualify for QSBS.

Our team helps analyze:

• • Business operations and revenue model
  • Intellectual property ownership
  • Government contract provisions
  • Data rights and technology rights
  • Active business asset requirements
  • Potential planning opportunities and documentation needs

The earlier the analysis is performed, the more opportunities may exist to address issues before a transaction is on the horizon.

The takeaway

If you are a government contractor, don't assume QSBS is unavailable simply because your customers are government agencies.

Many technology-enabled and product-focused GovCon companies may qualify, but the answer depends on the specific facts and circumstances of the business.

If your company has intellectual property, software, technology, data assets, or proprietary products, it may be worth exploring whether QSBS could significantly reduce the tax cost of a future sale.

The best time to evaluate QSBS eligibility is before you need the answer. Contact our team to discuss whether your business may qualify and what planning opportunities may be available.