A recent Tax Notes piece by Manoj Viswanathan of the University of California College of the Law, San Francisco argues that the current system for claiming the Qualified Small Business Stock exclusion places too much responsibility on the wrong party. Rather than requiring shareholders to prove Section 1202 eligibility years after stock is issued, he proposes shifting that burden to the issuing corporation through a formal certification and reporting regime.
At the center of the issue is a structural mismatch. Under current practice, a shareholder claims the Section 1202 exclusion on Form 8949 without any required certification from the corporation, even though many of the key eligibility facts — including gross assets, active business status, and disqualifying redemptions — are matters the corporation is far better positioned to know. That makes enforcement difficult and gives shareholders an incentive to claim a valuable tax benefit even when the supporting facts may be uncertain or incomplete.
Section 1202(d)(1)(C) states “such corporation agrees to submit such reports to the Secretary and to shareholders as the Secretary may require to carry out the purposes of this section”, however to date no such reporting has been required. Viswanathan seeks to change that, implementing a new reporting requirement aimed at facilitating QSBS management.
Why the Issue Is Becoming More Urgent
The stakes have grown as QSBS itself has become more valuable. Viswanathan points to Treasury data showing that QSBS exclusions averaged roughly $14 billion annually from 2012 through 2022, with forgone tax revenue averaging about $3.3 billion per year and peaking near $12 billion in 2021. In his view, those figures suggest that Section 1202 is both more widely used and more costly than earlier estimates anticipated.
That concern becomes more pressing in light of the One Big Beautiful Bill Act. The 2025 legislation expanded Section 1202 by increasing the gross-assets threshold from $50 million to $75 million, raising the exclusion cap from $10 million to $15 million for post-July 4, 2025 stock, and introducing a tiered holding period that allows partial exclusions beginning at three years. Yet despite broadening the benefit, Congress did not add any corresponding certification or reporting requirements.
The Proposed Fix
The proposed solution is a new Form 1099-QSBS. Under this framework, a corporation issuing stock it believes qualifies as QSBS would file the form with the IRS and furnish it to the shareholder at issuance. The filing would not merely support QSBS treatment — it would be a condition of that treatment. The form would certify the core issuer-level requirements, including C corporation status, compliance with the gross-assets test, engagement in a qualified trade or business, and the absence of disqualifying redemptions.
The proposal does not stop at issuance. Because Section 1202 qualification can depend on ongoing compliance during the holding period, corporations would also provide annual status reporting. If previously certified stock later ceased to qualify, the corporation would notify both the IRS and affected shareholders.
Part of the logic is practical. Corporations already possess the information needed to assess most QSBS requirements, while shareholders often have to reconstruct those facts much later, sometimes after the corporation has materially changed or no longer exists. Centralizing certification at the issuer level would reduce duplicative diligence, make audits more manageable, and lower the compliance burden for less sophisticated shareholders.
The Broader Takeaway
There is also a larger policy point behind the proposal. If Section 1202 is supposed to encourage investment in small businesses, then the exclusion should matter at the time of investment, not first appear as a tax benefit discovered years later. Mandatory issuer certification would serve as a screening mechanism by forcing companies to evaluate QSBS status at issuance and making it more likely that the benefit is actually communicated to investors in real time.
The framework also includes a shareholder safe harbor. A shareholder who reasonably relies on a Form 1099-QSBS and later annual status reports would not face accuracy-related penalties if the corporation’s certification later proves wrong, absent knowledge of the error or involvement in fraud. That would place the penalty risk more squarely on the corporation, which controls the relevant facts.
The broader message is that QSBS reporting has not kept pace with the scale and complexity of the exclusion. Issuer-based certification is presented as a relatively modest reform, but one that could materially improve enforcement, reduce uncertainty, and better align Section 1202 with its stated purpose. As QSBS continues to expand, that kind of reporting infrastructure may become harder to avoid.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.