/>iThe qualified small business stock (QSBS) rules can be a powerful tax planning tool, and, following the recent enactment of a signature tax law, they have become even more potent.
The 2025 tax law, Public Law 119-21, also known as the One Big Beautiful Bill Act (OBBBA), quietly enhanced the already-powerful Internal Revenue Code Section 1202, which was originally designed to encourage growth in start-ups. Section 1202 permits capital gain exclusion on all or a portion of the sale proceeds of QSBS. The OBBBA lowers the threshold for qualifying as QSBS, while simultaneously increasing the tax exclusions. These changes may make C corporations a more attractive entity form for small and mid-size businesses. They also make the possibility of “stacking” the QSBS gain exclusion more appealing to companies that are expected to grow substantially over time.
Prior to the OBBBA’s enactment, the three major requirements for QSBS treatment for stock were that (1) the business could not have more than $50 million in aggregate gross assets, (2) the taxpayer had to hold the stock for more than five years, and (3) the business had to be a C corporation. Additional requirements applied as well, including in relation to the timing of the stock issuance date, how the stock was acquired, the business of the corporation and its assets, and stock redemptions by the corporation around the time of the QSBS issuance, among others. The OBBBA increased the $50 million aggregate gross asset limitation to $75 million, adjusted for inflation beginning in 2027. It also replaced the five-year holding period with a phased-in holding period of three years for a 50% exclusion, four years for a 75% exclusion, and five years for a full 100% exclusion.
Additionally, pre-OBBBA, the eligible gain exclusion was the greater of $10 million or 10 times the adjusted basis of the corporation’s stock (with special rules governing the determination of that basis). The OBBBA increases the minimum eligible gain exclusion to $15 million (although the 10-times adjusted basis threshold is unchanged). This amount is also now adjusted for inflation beginning in 2027. The OBBBA left the other QSBS rules and requirements largely untouched.
The OBBBA changes to the QSBS regime apply only to stock issued on or after July 5, 2025, and generally are effective for tax years beginning after that date. Any stock issued prior to July 5 is still subject to the old rules, including the hard five-year holding period and the lower $10 million exclusion amount, with no adjustments for inflation.
