On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) made major updates to the Qualified Small Business Stock (QSBS) rules which affect small business owners and investors looking to reduce capital gains taxes.
These new rules apply only to stock acquired on or after July 4, 2025. If you acquired QSBS before that date, the old rules still apply.
What is Qualified Small Business Stock?
Qualified Small Business Stock refers to shares of a domestic C corporation that meet specific requirements under Internal Revenue Code (IRC) Section 1202. To encourage investment in small businesses, QSBS — also referred to as Section 1202 stock — offers significant tax incentives to investors, most notably the ability to exclude a portion (or all) of the gain on the sale of the stock from federal income tax if certain conditions are met.
To qualify as QSBS:
- The company must be an active, incorporated U.S. C corporation.
- The corporation must be a qualified small business at the time of issuance. In the past, this means it must have gross assets of $50 million or less, but as of July 4, 2025, this is now increased to $75 million under OBBBA. (More on that below.)
- The stock must be held for at least five years to potentially qualify for the full capital gains exclusion (or less, under OBBBA's new partial exclusion rules explained below).
- At least 80% of the corporation's assets must be used in the active conduct of a qualified trade or business.
QSBS can offer substantial tax savings for founders, early employees, and investors in eligible startups and small businesses. However, not all stock in small businesses automatically qualifies, making it important to carefully document eligibility and consult a tax advisor who can help determine if your business meets all the requirements.
New partial exclusion rules
Before OBBBA’s amendment, Section 1202’s 100% gain exclusion was available after a holding period of at least five years. Though that’s still true, under the new law, partial tax breaks are available even earlier.
- If your QSBS is held more than three years, you get a 50% gain exclusion.
- If your QSBS is held more than four years, you get a 75% gain exclusion.
- If your QSBS is held five years or more, you get a 100% gain exclusion (unchanged).
If you use the 50% or 75% QSBS exclusion, the remaining gain is taxed at 28%, but it won’t trigger the alternative minimum tax (AMT). The new OBBBA rules don’t change how QSBS bought before Sept. 27, 2010, is treated. For gains under the new three- or four-year OBBBA holding periods, any non-excluded portion is also taxed at 28% and still avoids the AMT.
Raising the QSBS limits
For all QSBS issued on or after July 4, 2025, the lifetime gain exclusion limit has increased from $10 million to $15 million per shareholder.
Additionally, the “aggregate gross asset” test for businesses issuing QSBS has also expanded. Previously, a company had to have $50 million maximum in gross assets. Under OBBBA, that limit is now up to $75 million in gross assets at the time of stock issuance.
Stacking QSBS to maximize gains
For business owners with substantial capital gains, another way to potentially boost tax savings is by using non-grantor U.S. trusts to “stack” QSBS exclusions (in other words, combining multiple exclusions from different sources). Gifting QSBS to family members allows them to also take advantage of the Section 1202 exclusion and avoid some or all capital gains taxes.
For example, instead of one business owner using a QSBS exclusion, they could gift QSBS to their family members, and then each individual could use a separate exclusion — potentially adding up to a larger total exclusion.
Of course, it’s important to ensure that each trust is carefully structured, so it qualifies as an irrevocable non-grantor trust. Also, these gifts count against lifetime estate and gift tax exemptions.
The improved QSBS tax benefits from OBBBA mean this is a great time to revisit this strategy with your tax advisor.
We’re here to help
If you’re considering raising capital or investing in a small business, timing matters more than ever. These changes could significantly increase your tax savings — but only if your stock qualifies under the new rules.
We’re here to help you evaluate your current holdings and plan strategically for future opportunities. Reach out to your Mowery & Schoenfeld tax partner today with any questions. Contact us
READ MORE: How the new tax law affects businesses
READ MORE: What the One Big Beautiful Bill Act means for individuals
READ MORE: How the OBBBA changes charitable deductions