QSBS Red Flags: Excluded Trades & The 80% Test
QSBS Red Flags: Excluded Trades & The 80% Test
A critical audit of the “Qualified Trade” definition, working capital limits, and the disqualifying redemption traps.
Executive Summary
- Excluded Services: Section 1202(e)(3) explicitly disqualifies health, law, consulting, and financial services. OBBBA reinforces this ban.
- The 80% Rule: At least 80% of assets must be used in the active conduct of business. Hoarding cash for >2 years can kill eligibility.
- Redemption Trap: Buying back significant stock from shareholders within a 2-year window can disqualify all issued stock.
The “Reputation” Clause
Any business where the principal asset is the reputation or skill of its employees (e.g., a celebrity-backed brand or boutique consulting) is automatically excluded. This is the #1 audit trigger for service-heavy startups.
Mechanic: Compliance KPIs
≥80%
Active Assets
<10%
Real Estate
2 Years
Working Cap
Strict
QTOB Test
Simulation: The Cash Trap (Failed 80% Test)
Tax Outcome: Active Capital vs. Hoarded Cash
| Business Type | QSBS Verdict | Reasoning |
|---|---|---|
| SaaS / AI Platform | Qualified | Product-based revenue |
| Consulting Firm | Excluded | Relies on skill/reputation |
| Fintech (Lending) | High Risk | Banking/Finance exclusion |
“QSBS is for builders, not hoarders. Holding too much cash without a deployment plan is the silent killer of tax benefits.”
Essential Resources
INTERNAL
BMT Playbooks