What Businesses Qualify as QSBS?
Qualified small business stock, Section 1202, is most commonly used within the startup community. Software, AI, and hardware all seem to be well-established QSBS-eligible businesses. However, that does not exclude other businesses from being QSBS-eligible.
The law itself lists certain categories of businesses that are disqualified (i.e. excluded) from being “qualified trades or businesses.”
In broad strokes, these excluded businesses tend to be:
Service businesses where the “principal asset” is the reputation or skill of one or more employees (i.e. personal services)
Financial / investment / banking / insurance / brokerage / financing / leasing / investing businesses
Farming, oil & gas, mineral extraction
Hotels, motels, restaurants, and similar hospitality operations
Businesses involving “passive” investment of funds
Businesses in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, athletics, consulting
Some real estate / rental operations (depending on whether they are considered “active” or “investment” type)
Section 1202 identifies these business categories in the negative; however, it does not identify businesses in the affirmative that qualify for QSBS. This leaves a large surface area of potential businesses that are QSBS eligible.
1. Software, SaaS, and Technology Products
Software and technology are among the most QSBS-friendly sectors - especially if the business sells or licenses a product rather than consulting services.
Examples include:
A SaaS platform that charges recurring subscription fees for access to its software.
A cybersecurity company developing proprietary code used by third parties.
An AI company licensing models or APIs rather than providing “advisory” work.
2. Manufacturing, Hardware, and Electronics
Manufacturing companies - from small specialty component producers to consumer electronics - are classic QSBS candidates.
Why? They typically:
Employ capital-intensive operations (equipment, factories, inventory).
Create tangible goods, meaning the business’s value resides in assets and IP, not personal skill.
Even contract manufacturing arrangements can qualify if the corporation retains ownership of designs, IP, and customer relationships.
3. Machine Tools, Industrial Equipment, and Automation
Companies building machine tools, robotics, or industrial automation systems almost always fit within “qualified trade or business” rules.
They’re capital-heavy, involve IP creation, and contribute to productive industry - exactly what Section 1202 was designed to encourage.
For example, a robotics startup manufacturing automated sorting machines for warehouses would qualify; but a consulting firm that helps clients optimize robotic workflows would likely not.
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4. Biotech and Life Sciences (Excluding Patient Care)
Biotechnology and life sciences companies typically qualify so long as they don’t directly provide medical services.
Examples include:
A company developing gene therapy or RNA-based drugs.
A diagnostic test developer selling kits to labs or hospitals.
A medical device or wearable manufacturer.
The distinction is between developing or producing technology (eligible) versus delivering health services (ineligible).
So a company running a chain of clinics or telemedicine consultations would not qualify; but a business that creates the underlying devices or software for those clinics could.
5. Devices, Instrumentation, and Scientific Equipment
This includes companies designing or producing specialized equipment - from lab instruments to IoT sensors.
These businesses qualify because they are product-driven, not service-driven.
Even if the products are used in excluded fields (like healthcare or finance), the company’s core activity - manufacturing and selling the tools - is typically a qualified trade.
6. Clean Energy and Green Tech
The energy transition has opened the door to QSBS-friendly innovation in sectors like solar, battery storage, carbon capture, and sustainable materials.
Examples include:
A company developing solar panel hardware or energy management software.
A startup producing bio-based packaging materials.
A battery recycling plant using proprietary processes.
What matters is that the business is developing, producing, or deploying technology - not merely investing in energy projects or leasing real estate (those are excluded).
7. Consumer Goods and Product Design
Companies that create, produce, or distribute consumer products can often qualify - especially if they own the supply chain, IP, or brand.
Examples:
A direct-to-consumer beverage company producing its own formulas.
A company that designs and manufactures outdoor gear or apparel.
A beauty brand with in-house R&D and production.
Note: If the company’s activities lean too heavily toward retail or hospitality (like a restaurant or hotel), it risks exclusion. But owning a consumer product line - even with an online store - typically qualifies.
8. Specialty Manufacturing and Non-Service Engineering
These are companies engaged in designing, fabricating, or assembling complex systems, not merely consulting about them.
Examples include:
Aerospace component manufacturers.
Semiconductor fabrication startups.
Industrial materials R&D companies.
Even “engineering” can qualify if it produces a tangible product (like an aerospace part), as opposed to professional engineering services (like consulting for others’ designs).
9. Distribution and Logistics Businesses
Businesses with a strong operational or inventory component often qualify.
For instance:
A regional distributor of specialty parts, equipment, or consumables.
A logistics company operating its own warehouses and technology systems.
Because these businesses deploy assets and systems (rather than individual expertise), they typically satisfy the 80% active-business test.
10. Platforms and Marketplaces
Online platforms and marketplaces can qualify if they operate as facilitators rather than pure brokers.
Examples include:
A marketplace charging SaaS fees for access, or taking spread-based commissions on sales of goods.
A two-sided platform that provides technology, logistics, or fulfillment infrastructure.
However, if the business’s core function is matching buyers and sellers for a fee (like an investment brokerage or real estate agent), it risks being treated as an excluded “brokerage services” business.
Conclusion
Qualifying for QSBS is about more than meeting technical requirements. It depends on whether your business is building something scalable and tangible rather than providing services based on personal expertise.
Companies that create products, software, or technology often meet the intent of Section 1202. The distinction comes down to where the value lives: in a product or system, or in the skills of individuals.
Because the potential tax savings can be significant, founders should structure early, keep detailed records, and confirm eligibility with a qualified tax advisor.
