How does the QSBS exclusion work?

Under Section 1202, founders and early investors who hold qualified C-corp stock for 5+ years can exclude up to the greater of $10M or 10x basis from federal capital gains tax — completely. For a founder selling for $50M who held since formation, that can mean zero federal tax on the entire gain.

What companies qualify as QSBS?

Domestic C-corporations with under $50M of gross assets at issuance, in qualifying trades (most are — but health, law, accounting, consulting, financial services, and farming are excluded). The stock must be acquired at original issue (not secondary purchases) and held 5 years.

How can investors stack QSBS exclusions?

Stacking strategies include gifting stock to non-grantor trusts (each trust gets its own $10M exclusion) and to family members in lower brackets. Done well, a single position can multiply the available exclusion many times over — turning a $50M exit into a tax-free event for the family.

New Qualified Small Business Stock Benefits for 2025 and Beyond

The One Big Beautiful Bill Act (OBBB Act) has brought big updates to Qualified Small Business Stock (“§1202 QSBS”) provisions. These changes create exciting new opportunities for entrepreneurs and investors alike.

If you’re looking to maximize tax benefits when investing in small businesses, these updates to §1202 of the Internal Revenue Code are worth your attention. Let’s break down what’s changing and how you can benefit.

What is Qualified Small Business Stock?
Key Changes to the Rules
New Tiered Gain Exclusion
Increased Dollar Limitations
Higher Asset Ceiling
Qualification Requirements
Smart Planning Strategies
Conclusion

What is Qualified Small Business Stock?

Qualified Small Business Stock represents shares in certain C corporations that offer big tax advantages to investors. When you hold this special type of stock for the required period, you may exclude some or all of your capital gains from federal income tax when you sell.

Think of it as the government’s way of encouraging investment in small businesses that drive economic growth.

Before the recent changes, investors could potentially exclude 100% of gains on Qualified Small Business Stock acquired after September 2010 and held for at least five years. The new rules make these benefits even better.

Key Changes to the Rules

The OBBB Act introduces three game-changing improvements for Qualified Small Business Stock acquired after July 4, 2025:

A flexible tiered exclusion system based on how long you hold the stock
A higher cap on how much gain you can exclude per company
An increased asset threshold that lets more businesses qualify

These enhancements make Qualified Small Business Stock an even more powerful tool in your investment and tax planning toolkit.

New Tiered Gain Exclusion

The most exciting change is the new tiered structure that rewards investors based on holding periods. For Qualified Small Business Stock acquired after July 4, 2025:

3-year hold: 50% gain exclusion (up to dollar limitations below)
4-year hold: 75% gain exclusion (up to dollar limitations below)
5+ year hold: 100% gain exclusion (up to dollar limitations below)

This graduated approach gives you more flexibility with your exit strategy. No longer must you wait the full five years to see any tax benefit.

For stock acquired between September 27, 2010, and July 4, 2025, the original rules still apply – 100% exclusion after five years.

Increased Dollar Limitations

Your potential tax savings are getting bigger too. For Qualified Small Business Stock acquired after July 4, 2025, the per-issuer exclusion cap jumps to the greater of $15 million or 10x investment cost basis. This amount is up from the greater of $10 million or 10x investment cost basis under prior law.

What does this mean for you? You can potentially shield significantly more profit from capital gains tax when you sell your qualifying investments.

Holding Period	Applicable Exclusion %	Estimated Federal Income Tax Savings assuming 23.8% tax rate for LTCG + NIIT
3 years	50%	($119,000 tax savings per $1 million of gain)
4 years	75%	($178,500 tax saving per $1 million of gain)
5 years or more	100%	($238,000 tax saving per $1 million of gain)

Even better, this $15 million limit will adjust with inflation after 2026, potentially growing your tax benefit over time.

Higher Asset Ceiling

More businesses will now qualify as “small” under these rules. The OBBB Act increases the aggregate gross asset ceiling from $50 million to $75 million for stock issued after July 4, 2025.

This 50% increase in the qualifying threshold means:

More companies will be eligible for Qualified Small Business Stock status
You’ll have a wider pool of potential investments that qualify for these tax benefits
Growing companies have more room to expand before losing eligibility

Like the dollar limitation, this $75 million ceiling will also adjust for inflation after 2026.

Qualification Requirements

To benefit from these enhanced Qualified Small Business Stock provisions, make sure your investment meets these criteria:

It must be stock in a U.S. C corporation
You must acquire it directly from the company (original issue)
The company must qualify as a small business when you acquire the stock
The business must remain active during your holding period
The company cannot be in certain excluded industries that involve the performance of services (ex. health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees)
Exit must be a stock sale rather than a sale of the corporation’s assets
Redemptions prior to QSBS issuance or after QSBS issuance may disqualify status

According to Holland & Knight, these expanded provisions represent “one of the most significant tax benefits available to entrepreneurs and investors in emerging companies.”

Smart Planning Strategies

With these enhanced benefits, consider these practical strategies:

For Entrepreneurs:

If starting a new business, the C corporation structure now offers even stronger tax advantages
If your business is approaching the $50 million asset mark, consider timing your growth to benefit from the new $75 million threshold after July 2025

For Investors:

Verify a company’s Qualified Small Business Stock eligibility before investing
Plan your exit strategy around the new 3, 4, and 5-year milestones
Keep detailed records of your stock acquisition date and the company’s compliance with requirements

The right planning can significantly increase your after-tax returns on qualifying investments.

Conclusion

The enhanced Qualified Small Business Stock rules create a remarkable opportunity for both investors and entrepreneurs. With graduated tax benefits, higher exclusion limits, and an expanded definition of qualifying businesses, now is the time to incorporate these changes into your planning.

These improvements take effect for stock acquired after July 4, 2025. Start positioning your business or investment strategy today to maximize these benefits tomorrow.

Have questions about how these Qualified Small Business Stock changes might benefit your specific situation? Need help developing tax strategies that leverage these new rules? Contact Us today to speak with one of our accounting professionals.

Please note this should not be relied on as tax advice, every situation and fact pattern is different and this article does not include all applicable law and rules. Please consult with a qualified tax professional for individualized guidance.