Anika co-founded an Albuquerque software company, but her stake is not in her own name. In September 2025 the company issued shares to an LLC that she and two outside investors own, and the LLC files a partnership return. With a buyer calling, her investors ask whether the federal exclusion for QSBS (shares of a qualified small business) reaches them through the LLC, and what New Mexico then takes.
It can. But the LLC brings rules that a direct shareholder never meets, and several turn on dates nobody can fix later.
What did the One Big Beautiful Bill Act change for QSBS?
The One Big Beautiful Bill Act, Pub. L. 119-21, § 70431, signed July 4, 2025, rebuilt the exclusion for stock acquired after that date. Under 26 U.S.C. § 1202(a)(1)(B) and the table in § 1202(a)(5), a non-corporate holder excludes 50 percent of the gain after three years, 75 percent after four, and 100 percent at five years or more. Stock acquired from September 28, 2010 through July 4, 2025 keeps the old rule: 100 percent after more than five years (§ 1202(a)(4)).
For new stock the per-issuer cap is $15,000,000 (§ 1202(b)(4)(B)), up from $10,000,000, or ten times basis if larger (§ 1202(b)(1)). It is indexed for taxable years beginning after 2026 (§ 1202(b)(5)); as of October 23, 2026 the IRS had not, to my knowledge, published the 2027 figure. The gross-assets ceiling at issuance rose from $50 million to $75 million for shares issued once the Act took effect (§ 1202(d)(1)).
Who in a New Mexico LLC gets the section 1202 exclusion when the LLC sells?
Section 1202(g) extends the exclusion to owners of any partnership or S corporation, which the statute calls a “pass-thru entity” (§ 1202(g)(4)). The LLC is tested as if it were an individual and must hold the shares at least three years (§ 1202(g)(2)(A)); each member is then tested separately.
Under § 1202(g)(2)(B), the member must have held the interest producing the gain “on the date on which such pass-thru entity acquired such stock and at all times thereafter.” Someone admitted after the purchase gets nothing on that stock. Section 1202(g)(3) caps even an original member at what the interest held on the acquisition date would produce, so a member whose percentage grows later through a buyout or an amended allocation excludes only up to her starting share.
The dollar cap is personal: under § 1202(g)(1)(B) each member applies his or her own $15 million limit. (Gifts of LLC interests are covered in the firm’s post on gifting QSBS in New Mexico.) In an LLC’s records, I look first for the acquisition date and each member’s percentage that day.
Does “interest” in section 1202(g) mean a capital interest or a profits interest?
The statute does not say. The nearest regulation, Treas. Reg. § 1.1045-1, was written for the rollover under 26 U.S.C. § 1045 (reinvesting within 60 days of selling QSBS held over six months). It caps a partner’s deferral at the “smallest percentage interest in partnership capital,” fixed when the partnership bought the stock and reduced for later capital shifts (§ 1.1045-1(d)). Applied to § 1202, that measure would leave a member holding only a profits interest with nothing.
I found no Tax Court or circuit decision construing § 1202(g). A New Mexico member’s Tax Court case would be appealed to the Tenth Circuit under 26 U.S.C. § 7482(b)(1)(A), which has not addressed it (see the firm’s post on where a New Mexico taxpayer fights the IRS). Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), matters less today than people suggest, because there is no § 1202(g) regulation to defer to. It may matter later: § 1202(k) expressly authorizes rules against avoidance through “partnerships, or otherwise,” and Loper Bright tells courts to respect express delegations within their limits. A Treasury attorney said in May 2026 that § 1202 regulations were in development; I found none proposed as of October 23, 2026. Careful practice answers the gap with records of each member’s capital account and profits share on the day the LLC buys.
Does New Mexico tax QSBS gain that passes through an LLC?
New Mexico has no QSBS statute; it simply starts from the federal number. NMSA 1978, § 7-2-2 builds “base income” from federal adjusted gross income, and excluded gain never enters federal AGI. One addition reaches income “not included in adjusted gross income but upon which a federal tax is calculated,” but because the minimum tax preference in 26 U.S.C. § 57(a)(7) now reaches only stock acquired by September 27, 2010, I do not read it as pulling newer excluded gain back.
The taxable remainder faces rates up to 5.9 percent, which applies above $315,000 on a joint return and $210,000 for a single filer (NMSA 1978, § 7-2-7, taxable years 2025 and later). The deduction in NMSA 1978, § 7-2-34, for taxable years beginning on or after January 1, 2025, is the greater of $2,500 of net capital gain or 40 percent of up to $1,000,000 of net capital gain income “from the sale of a business” allocated or apportioned to New Mexico. “Business” is undefined, and whether a member’s share of an LLC’s stock sale qualifies is a question for New Mexico-licensed counsel.
How would the numbers work for Anika’s Albuquerque LLC?
Illustration only. The company issued shares to the LLC for cash on September 15, 2025, with gross assets well under $75 million. Anika holds 50 percent of the LLC’s capital, Investor A 30 percent, Investor B 20 percent. A fourth member buys 10 percent in 2027, diluting the others to 45, 27 and 18 percent; sale gain follows percentages at the sale. The LLC’s gain is $12 million. Everyone is in the top brackets and owes the net investment income tax.
Sold in October 2029, after four years, 75 percent is excluded. Anika’s $5.4 million share fits within her 50 percent starting interest, so she excludes $4.05 million. The other $1.35 million is “section 1202 gain” under 26 U.S.C. § 1(h)(7), taxed at no more than 28 percent under § 1(h)(4) ($378,000), plus 3.8 percent under 26 U.S.C. § 1411 ($51,300). Investors A and B exclude $2.43 million and $1.62 million. The fourth member’s $1.2 million gets no exclusion (20 percent plus 3.8 percent, or $285,600). In New Mexico, Anika’s $1.35 million less the $2,500 deduction costs about $79,500 at 5.9 percent. Sold after September 15, 2030, the three original members exclude all of their $10.8 million. For Anika, waiting is worth roughly $509,000.
Suppose the LLC instead distributes Anika’s 45 percent of the shares to her in 2028. That is generally tax-free under 26 U.S.C. § 731(a), with the LLC’s basis carrying over under § 732(a)(1). Because § 1202(h)(2)(C) covers transfers “from a partnership to a partner” meeting rules similar to subsection (g), she is treated as acquiring the shares as the LLC did and holding them since September 15, 2025 (§ 1202(h)(1)), so she picks her own sale date. A block above her starting 50 percent would invite trouble. Oddly, (h)(2)(C) still mentions a “5-year holding period requirement,” wording Congress left alone in 2025.
Should a New Mexico LLC convert to a C corporation to start the QSBS clock?
A New Mexico LLC may convert to a corporation with the approval its operating agreement requires (all members if it is silent) under NMSA 1978, § 53-19-60.1, and § 53-19-61 makes the result “for all purposes the same entity.” The federal side is where the planning lives.
Rev. Rul. 2004-59 treats a conversion under a formless state statute, which New Mexico’s appears to be, as the LLC contributing its assets to the corporation for stock and then liquidating, so the members receive their shares in a partnership-to-partner transfer. Under § 1202(i)(1), stock received for property is acquired on the exchange date with a basis no lower than fair market value. The holding period therefore starts at conversion, and value built up inside the LLC stays outside the exclusion. Contributed property counts at fair market value toward the $75 million test (§ 1202(d)(2)(B)), and buying out a member near conversion can trip the redemption rules of § 1202(c)(3).
| Structure | Who can exclude gain | Holding period and interest limits | Section 1045 rollover |
|---|---|---|---|
| Shares held directly | The shareholder | Own holding period and cap | Shareholder may elect; 60 days to reinvest |
| LLC taxed as a partnership | Members holding interests when the LLC bought, up to those interests | LLC holds new stock at least three years; later members excluded | LLC or eligible member; capped at smallest capital percentage |
| Shares distributed by the LLC | The member, as if acquired like the LLC | LLC’s holding period carries over (§ 1202(h)(1)) | Member may elect, subject to Treas. Reg. § 1.1045-1(e) |
| S corporation as holder | Shareholders on the purchase date, to that extent | Same subsection (g) tests; no (h)(2)(C) analog | Unsettled; the regulation addresses only partnerships |
| Single-member LLC, no election | The owner, as a direct holder | Disregarded under Treas. Reg. § 301.7701-3(b)(1)(ii) | Owner may elect |
Frequently Asked Questions
Does a member admitted after the LLC bought QSBS get any exclusion?
Not on that stock. Section 1202(g)(2)(B) requires holding the interest when the LLC acquired the shares and continuously afterward.
Can I contribute QSBS I already own to an LLC and keep the exclusion?
Generally no. Under Treas. Reg. § 1.1045-1(f), shares lose QSB status once a partnership receives them as a contribution, and § 1202(h) does not list that transfer.
Is the $15 million QSBS cap applied per LLC or per member?
Per member. Section 1202(g)(1)(B) treats each member’s share as gain on the issuer’s stock, and the cap is indexed for taxable years beginning after 2026.
Does New Mexico tax gain excluded under section 1202?
No. New Mexico starts from federal adjusted gross income under NMSA 1978, § 7-2-2, and excluded gain never enters it.
When does the QSBS holding period start after an LLC converts to a corporation?
On the conversion date. Under § 1202(i)(1), time as an LLC does not count.
How North Star Law Firm Can Help
North Star Law Firm advises New Mexico founders and investors on business sale tax structuring, including QSBS modeling, and on business entity selection when an LLC is weighing conversion. Its tax law practice covers the New Mexico side too.
Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court and is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico. The firm works alongside New Mexico-licensed counsel on state-law questions. If your shares sit inside an LLC and a buyer is asking about timing, contact North Star Law Firm.