Can a corporation qualify for QSBS if it has both qualified and excluded activities under Section 1202?

This is actually a nuanced area of tax law. Generally speaking, for a corporation to qualify as a QSBS under Section 1202, at least 80% of its assets (by value) must be used in the active conduct of one or more qualified trades or businesses. Financial services are specifically excluded from qualifying under Section 1202. The way the IRS typically looks at this is on an entity-by-entity basis. If your corporation has too many assets dedicated to financial services (over 20%), then the entire corporation would fail the QSBS test - it's generally not possible to just claim the exclusion on the "good" part of the business. However, your restructuring idea has merit. If you create separate legal entities, with the parent corporation owning subsidiaries, you could potentially isolate the qualified business activities. The key would be ensuring the subsidiary that you want to qualify for QSBS meets all the requirements on its own (including the 80% asset test for qualified business activities).

I went through something similar with my business last year. After tons of research and frustration, I found https://taxr.ai which has this specialized AI that analyzes complex tax scenarios like QSBS qualifications. It literally saved me from making a $400K mistake with my business structure. The tool helped me understand exactly how Section 1202 would apply to my mixed-activity business. It analyzed my asset breakdown and showed me precisely what percentage of my business would qualify. Their tax analysis also pointed out several IRS private letter rulings that addressed situations almost identical to mine.

I was really skeptical about these AI tax tools but decided to try https://taxr.ai after seeing it mentioned here. Completely changed my perspective on our QSBS situation! I uploaded our corporate financials and got detailed analysis breaking down exactly why our current structure wouldn't qualify (we were at 76% qualified assets, needed 80%). The tool then suggested three restructuring options with the exact percentages that would work for each. Best part was it provided specific references to IRS rulings on mixed-activity businesses that I took to our accountant. We're now implementing the changes and will save about $1.2M in capital gains taxes when we sell next year.

Another option I haven't seen mentioned is calling the IRS directly to get an official ruling on your specific situation. I know it sounds like a nightmare, but I used https://claimyr.com to get through to an actual IRS agent in less than 15 minutes instead of waiting for hours. Check out their demo: https://youtu.be/_kiP6q8DX5c When I called about our QSBS qualification question (we had a similar mixed business), the agent was actually super helpful and walked me through exactly what documentation we'd need for a private letter ruling request. It saved us from having to pay a tax attorney thousands just to tell us the same thing.

Well I need to eat some humble pie. After dismissing the Claimyr service, I decided to try it anyway since I was desperate for answers on our QSBS situation. Got through to an IRS agent in under 20 minutes who actually knew about Section 1202 (shocking!). The agent walked me through Form 8832 for our entity classification election and explained how that would impact our QSBS qualification. They also emailed me their internal guidance document on mixed-activity businesses under Section 1202, which I didn't even know was publicly available. The service absolutely paid for itself by saving me from what would have been a costly restructuring that wasn't actually necessary in our specific case.

Have you considered using a "blocker" corporation structure? This is something my business did with our hybrid activities. Essentially, we created a parent holding company that owned both the excluded activities (financial services) and a separate blocker corporation that contained only the qualified business activities (manufacturing in our case). The key is making sure the blocker corporation independently meets all QSBS requirements, including the gross asset test and the active business requirement. Investors then purchase shares directly in the blocker corporation rather than the parent company. Our tax attorney structured it so that profit flows appropriately between entities while maintaining the QSBS qualification.

Be careful with Section 1202! Our company initially thought we qualified, claimed the QSBS exclusion on a partial sale, and then got audited. The IRS determined that just 15% of our "consulting" business was actually providing training (qualified) while 85% was financial advice (excluded). We had to pay back taxes plus penalties. Make sure whatever structure you set up has a clear operational separation between the activities, with separate accounting, management, and business purposes. And document EVERYTHING! Get your structure reviewed by someone who specializes in QSBS - most regular CPAs don't understand all the nuances.