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Section 1202 tax benefit: Defining “health” services

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Are health care-adjacent businesses eligible for QSBS benefits?
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August 18, 2025
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Key takeaways

Shareholders of qualified businesses may exclude up to 100% of gains from the sale of qualified small business stock.
Businesses that provide health services don’t qualify, but the term “health” is not clearly defined in the law.
It’s important to understand the key factors that affect whether a business qualifies.
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  • Business tax
  • Health care

Section 1202 of the Internal Revenue Code offers a valuable tax benefit—an exclusion of capital gains from gross income for those who qualify.

The exclusion can apply to as much as 100% of the gain from the sale of qualified small business stock (QSBS), but not all businesses meet the criteria of a qualified small business (QSB). One key exclusion applies to businesses performing services in the field of “health,” a term left undefined in the statute and regulations.

This article, published in Tax Analysts’ Federal Tax Notes, explores a wide range of health care-adjacent businesses and analyzes whether they fall within the scope of businesses excluded from section 1202. Drawing on IRS rulings, court decisions and related guidance, the authors provide practical insights and a framework to help taxpayers and advisers navigate these complex determinations with greater clarity and confidence.

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