Most biotech, medical device and health tech companies can qualify for Qualified Small Business Stock (QSBS) treatment under Section 1202, according to Myra Sutanto Shen, tax partner and head of the tax practice at Wilson Sonsini Goodrich & Rosati. The risk sits in a narrower band: businesses where licensed professionals deliver care, and structures that blur who actually owns the clinical operation.
Myra joined host Brady Weller on the QSBS, Solved podcast to discuss how life sciences companies raise capital, how the higher $75 million gross assets limit changes planning, and where the "services in the field of health" tripwire can come into play.
At a glance
Software startups typically form lean and raise later, giving founders years to plan around QSBS. Biotech companies often launch the opposite way: investors pair with an entrepreneur and fund the company at formation, frequently with a large check, because lab space and equipment are expensive.
Under the old $50 million gross assets limit, a $40 million to $50 million launch round could push a company to the edge of eligibility on day one. Myra said QSBS was historically a lesser consideration for biotech for that reason. The increase to $75 million under the 2025 legislation gives companies meaningfully more room.
Tranching is now a live planning tool. A $100 million Series A might close as $50 million upfront, with the second $50 million contingent on milestones and subject to investor discretion. Myra views that structure as two separate financings rather than one, with QSBS eligibility tested again when the second tranche closes. She said investors are increasingly encouraging companies to consider tranching for this reason.
Early employees. Because biotech valuations are high from the first financing, QSBS-eligible stock tends to reach only the CEO, the C-suite and the first investors. Later hires usually receive options instead. The CEO is often a hired entrepreneur rather than an IP-contributing founder, which makes even that initial grant more complex to structure.
Exits. Life sciences companies often exit sooner than software companies, despite a longer path to revenue. Heavy capital needs push them toward a sale or licensing deal when funding runs short. Acquisitions frequently feature small upfront payments and large milestone payments, raising questions about how QSBS applies to contingent consideration.
Asset composition. Excess cash is rarely the problem; Shen said these companies spend capital as fast as they raise it. The issue is that much of it buys equipment, which stays on the balance sheet instead of flowing out as payroll. Weller noted AI companies building data center capacity now face the same dynamic.
Section 1202(e)(3) excludes businesses performing services in health, law, engineering and other listed fields. The statute does not define the term, and there are no regulations. Myra relies on IRS private letter rulings, which are not binding but show how the agency reads the exclusion.
Those rulings treated the following as qualified trades or businesses:
In the pharmacy and testing rulings, the IRS emphasized that products were supplied on orders from physicians outside the company. Myra reads the line as falling between licensed professionals delivering care within the scope of their license, which is excluded, and everything ancillary to medicine, which generally is not. A biotech company can hire a physician as chief science officer without tainting its QSBS status, because that doctor is not treating patients.
Know that a consultative sales process does not, by itself, make a company a service business. Most enterprise software is sold that way.
The same section excludes any business whose principal asset is the reputation or skill of one or more employees. Shen frames it as a question of what the customer is buying. A software or biotech customer pays for something the company built. A patient or legal client pays for a specific professional's expertise, and the rest of the office is incidental.
Weller proposed a continuity test: could the business survive without that person? A cardiology practice can bring in another cardiologist. A creator-led media company may not survive the loss of its creator. Founder-driven giants such as Apple and Meta show the limits of the question, since their products are built by thousands of people.
Shen estimates practitioners agree on the answer about 98% of the time. The remaining cases depend on how conservatively an advisor reads the statute. She also flagged an open question: whether the reputation-or-skill language informs how the listed fields, including health, should be read.
Two areas give Myra’s team the most trouble. The first is digital health built on an MSO-PC model, where a technology company manages clinics but revenue is generated by affiliated physicians. Corporate practice of medicine rules drive that structure, and she expects the area to evolve over the next several years. The second is fintech, where some businesses resemble excluded financing or investment advisory activities.
For a complex health company, Shen's first question is who employs the medical professionals. If a small part of the business provides licensed services, such as a radiation technology company employing a few technologists, the company may still meet the requirement that at least 80% of assets be used in a qualified business.
In MSO-PC arrangements, the key issue is whether the professional corporation's separate ownership holds up for tax purposes, not just legally. If the arrangement looks like a variable interest entity that the MSO effectively owns, the clinical revenue may be attributed to the MSO. Respecting separate ownership on both fronts puts the company on firmer ground. The same logic applies to other adjacent lines, such as keeping a real estate brokerage outside a property software company.
Timing matters. These conversations work best at formation, when corporate counsel knows to bring in a QSBS-literate tax advisor. Restructuring three or four years in is harder, particularly when professional licenses must be moved.
Can a biotech company issue QSBS? Generally, we think “yes”. Some IRS private letter rulings have treated drug developers, device makers and manufacturers as qualified trades or businesses under Section 1202.
What is the QSBS gross assets limit after the 2025 tax law? $75 million, up from $50 million. The test applies at and immediately after the stock is issued.
Does a tranched financing count as one round for the gross assets test? You may be able to treat milestone-contingent tranches as separate financings when investors can decline to fund later tranches, with eligibility checked at each closing.
Does hiring a doctor disqualify a health company from QSBS? Not by itself. The exclusion targets licensed professionals providing services within the scope of their license, such as treating patients.
Are digital health MSO-PC companies QSBS eligible? It depends on facts. A key factor is whether the professional corporation's separate ownership is respected for tax purposes as well as legally.
The full conversation covers more ground, including why the 1993 statute has not kept pace with three decades of technology. Listen to Myra Sutanto Shen on QSBS, Solved [LINK].
This article is for informational purposes only and is not tax or legal advice. Consult a qualified advisor about your specific facts. Some information may be outdated, and descriptions of private letter rulings or IRC text may be incomplete or lack technical accuracy.
