Tax Law Center Blog

The “One Big Beautiful Bill Act” (OBBBA), enacted on July 4, 2025, has helpful changes to the Qualified Small Business Stock (QSBS) provisions of Code Section 1202. These changes, primarily effective for stock issued after July 4, 2025, require careful consideration by tax advisors counseling clients on investment in and dispositions of privately held companies.

For background, Qualified Small Business Stock (QSBS) refers to shares issued by certain domestic C corporations that, when held for a specified period, allow non-corporate taxpayers to exclude a significant portion or even all of their capital gains from federal income tax upon sale. This tax incentive aims to encourage investment in and growth of qualifying small businesses.

The OBBBA’s modifications to Section 1202 aim to enhance the attractiveness of QSBS as a tax-efficient investment vehicle. The major changes to QSBS include:

Tiered-Gain Exclusion Structure

A significant change is the introduction of a tiered system for gain exclusion, departing from the prior “five-year cliff” for a 100% exclusion. For QSBS issued after July 4, 2025, the following exclusion percentages apply based on holding period:

• 50% exclusion: For QSBS held for at least three years but less than four years.
• 75% exclusion: For QSBS held for at least four years but less than five years.
• 100% exclusion: For QSBS held for five years or more.

This phased approach provides greater flexibility for taxpayers, potentially enabling partial tax benefits from earlier liquidity events. Advisors should assess the implications of this change on investment horizons and exit strategies, particularly for clients seeking shorter-term exits.

Higher Per-Issuer Gain Exclusion Cap

The OBBBA increases the per-issuer gain exclusion cap from $10 million to $15 million. This adjusted cap will be subject to inflation adjustments commencing in 2027. While this change may not fundamentally alter QSBS planning for all clients, it provides an expanded benefit for those whose gains exceed the former limit, particularly as company valuations continue to grow. It appears that QSBS issued prior to July 5, 2025, remains subject to the original $10 million cap.

Revised Aggregate Gross Assets Threshold

The corporate-level aggregate gross assets threshold for QSBS eligibility has been raised from $50 million to $75 million. This updated threshold, also subject to inflation adjustments from 2027, broadens the universe of companies that can issue QSBS-eligible stock. This expanded limit provides additional capacity for emerging companies to raise capital while maintaining QSBS status, offering more runway for growth before exceeding the asset ceiling.

Practical Considerations for Tax Advisors:

These amendments necessitate a refined approach to QSBS planning and compliance:

• Differentiated Rules: Advise clients that different QSBS rules apply based on the stock’s issuance date. Stock acquired on or before July 4, 2025, adheres to the pre-OBBBA rules, while stock acquired after this date falls under the new provisions.
• Holding Period Optimization: Evaluate the implications of the tiered exclusion on client investment strategies. For some, accelerating a liquidity event to capture a 50% or 75% exclusion may become a viable option where the full five-year holding period is uncertain or undesirable.
• Enhanced Due Diligence: The increased thresholds and tiered exclusions may lead to greater scrutiny from tax authorities. Emphasize the importance of meticulous record-keeping to substantiate QSBS eligibility, including detailed documentation of the issuing corporation’s status and asset valuations at the time of issuance.
• Section 1045 Rollovers: Continue to leverage Section 1045 rollovers for eligible QSBS dispositions, which permit tax-deferred reinvestment into other QSBS. The amendments do not appear to alter the mechanics of this deferral strategy.
• Integrated Tax Planning: Incorporate QSBS considerations into broader client tax, financial, and estate planning. Expansion of the QSBS gain exclusion, combined with the higher gift and GST tax exemption, may provide additional opportunities for planning with QSBS, including funding of nongrantor trusts with QSBS that may be eligible to take their own QSBS exclusion on the sale of the QSBS.
• State Conformity: Remind clients that state tax treatment of QSBS varies. Federal changes do not automatically apply at the state level, requiring separate analysis of state-specific conformity to Section 1202.

The OBBBA’s revisions to Section 1202 foster investments in qualified small businesses. Tax advisors should assist clients in navigating these changes, optimizing their tax positions, and maximizing the benefits offered by the new QSBS provisions.