Companies that are engaged in activities that do not fall under the definition of a Qualified Trade or Business risk eligibility for their stock qualifying as Qualified Small Business Stock (“QSBS”).  All is not lost however if a company partakes in some “non-qualified” activities.  Provided the value attributed to such activities is generally below 20% of the company’s total value (as per IRC §1202(e)) for “substantially all” of a shareholder’s holding period, stock may still qualify as QSBS.

Determining whether a company is or is not in a Qualified Trade has proven challenging for many types of companies that may be related to the prohibited trades or businesses listed in IRC §1202(e). 

Perhaps the ineligible trade that has raised the most questions is “Health Services”. With over 20.5M employees (topping all other sectors per the 2019 US Census) and with large VC’s such as Deerfield Management and Northpond Ventures focused on the space, many ponder whether their stock could be QSBS.  Further evidencing the confusion around determining which health related companies are considered to be in a qualified trade, nearly half of the Private Letter Rulings the IRS has issued to date regarding Qualified Trades explore whether the companies being analyzed are operating in “health services”.  

As of January 2, 2024 however, companies have not been able to request such rulings from the IRS. Through Revenue Procedure 2024-3, the IRS has halted considering companies against the Qualified Trade criteria for QSBS.  Without the PLR route as an option, a more detailed framework may help guide taxpayers in assessing companies themselves.

What Exactly Are “Health” Services?

In their May 27, 2025 article published in TaxNotes, authors Joseph Wiener, Aman Tekballi, and Nick Gruidl, all members of accounting firm RSM’s National Tax practice, help to address the lack of clarity by performing a deep dive into what exactly may be considered to be the performance of “Health Services” in regards to QSBS.

The article first examines the general categories of companies that are involved in health related areas, categorizing them into the following:

• Administrative Services such as medical insurance billing companies typically are not staffed by medical professionals (i.e. doctors or nurses).
• Pharmaceutical or Drug Laboratories that manufacture or develop medication and have no patient interaction
• Non-Diagnostic assessments that service insurance companies (i.e. life insurance), or assessments that are provided pre-employment for government agencies.
• Personal Fitness and Exercise entities that construct plans for clients overall wellbeing.
• Mental Health providers such as clinics, social workers, professional counseling, life-coaches, that provide assistance in improving mental health or life goals. Some of these institutions are covered by health-insurance, while others are not.
• Other Health related services such as infertility testing and treatment, generic testing for couples compatibility, hair loss treatment, orthotics/shoe fitting/prosthetic services, acupuncture/homeopathy treatments, and veterinarian services.
  
• Part Housing, Part Medical while a medical aspect is involved in these housing businesses, often the medical portion of the bill is outsourced to other companies, types of entities that offer housing but outsource medical care include nursing homes, outpatient surgical centers, and emergency service transportation (e.g. air/ground ambulatory services)
• Health-Tech Services and Tools, especially regarding the growth in tele-medicine

Tax Guidance Helping to Define “Health Services”

The authors explore existing and historical legislation outside of §1202 to help interpret “performance of services in the field of health.”

In 1987, IRC §448, interpreted “performances of services in the field of health”  as the provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals.

The Tax Cuts and Jobs Act effective of 2018, §199A, further noted how  “performance of services in the field of health” can be defined as the provision of medical services by individuals such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals performing services in their capacity as such. 

Additionally, Private Letter Rulings (PLRs) over the past decade have examined whether specific companies are considered to be operating in “health services”:

• PLR 201436001 examined a company commercializing experimental drugs.
• PLR 201717010 involved a developer of a company that developed a proprietary health diagnostic.
• PLR 202125004 ruling concerned a manufacturer of healthcare products prescribed by providers. 

• PLR 202144026 ruling focused on a developer of software to support medical decision-making by doctors and patients.

• PLR 202221006 involved a mail-order retail pharmacy, distributing a limited range of drugs.

• PLR 202418001 analyzed a testing company offering tests by physician order, but had no direct patient contact. 

In each PLR, the IRS concluded favorably for QSBS, ruling that the company in question was not involved in “health services”, and provide insights regarding how the IRS works through such determinations.

 

Determining Whether a Business Operates in Health Services

As noted by co-author Aman Tekbali, “with limited statutory guidance, determining QSBS eligibility in this area requires careful analysis”.  The authors distill the analysis of whether a company is indeed operating in “health services” into key factors to consider.

1. Who the company employs and whether those employees are healthcare professionals (i.e. licensed / certified doctors regulated under laws related to medicine).
2. The capacity in which the company’s employees operate (i.e. providing treatment services more similar to physicians and nurses or more closely aligned with physical exercise, conditioning or general wellbeing).
3. How the company generates revenue (i.e. services based, selling a product/tool, or conducting research, testing, manufacturing and/or sales).
4. Whether the company has direct contact with patients.
5. If the company is diagnosing and/or treating patients, or if the services may not be directly related to a medical field, but are rather related to general physical exercise or conditioning.

What Steps Can a Company and Taxpayer Take?

Verifying whether a company or any of its activities may be considered to be an ineligible trade or business for QSBS is subject to the facts and circumstances surrounding each situation, and may be especially challenging in an area such as “health services”.  With the path certain companies have taken to have the IRS rule on their business no longer being available, careful consideration of relevant guidance (such as PLRs, IRC §1202, §199, and §448) is imperative, however putting that guidance into practice poses several challenges. 

The framework offered by the TaxNotes authors provides an approach that can help taxpayers navigate this challenging area.   

If after such an analysis, a company still does not appear likely to be considered operating in a qualified trade, alternative business structures may be another approach to segregate non-qualified trades from tainting QSBS eligibility in certain instances.

The facts and circumstances of each situation is the best place to start.  Initiate a diagnostic to delve further into your company or security and help assess whether the stock you hold may qualify as QSBS.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.