QSBS Tax Exemption Significantly Expanded Under the One Big Beautiful Bill Act

How Has the QSBS Exemption Changed?

Recent amendments to Internal Revenue Code Section 1202, introduced under the One Big Beautiful Bill Act, significantly expand the benefits available under the Qualified Small Business Stock (QSBS) tax exemption. These changes apply only to stock purchased on or after July 4, 2025, and they provide increased exclusion limits, reduced holding periods, and higher gross asset thresholds for qualifying businesses.

Key Enhancements Include:

1. Increased Exclusion Limits

The maximum gain exclusion increases from $10 million to $15 million for qualifying stock purchases made on or after July 4, 2025. This expanded benefit can substantially reduce taxable gains when founders or early investors sell their company.

2. Reduced Holding Periods With Partial Benefits

The revised rules introduce tiered exclusions based on the investor’s holding period:

50% exclusion for stock held 3–4 years

75% exclusion for stock held 4–5 years

100% exclusion for stock held 5+ years

Previously, taxpayers could only receive a 100% exclusion if they held their stock for at least five years.

3. Increased Gross Asset Threshold

The gross asset limit for a corporation to qualify as a “small business” increases from $50 million to $75 million, measured at the stock’s issuance date using tax basis, not fair market value.

These updated benefits apply solely to new stock issuances and do not apply to stock conversions through exchanges.

Who Qualifies for QSBS?

Individual Eligibility

To qualify:

Stock must be purchased directly from the corporation in exchange for money, property, or services

Stock purchased from another shareholder does not qualify.

Company Eligibility

A business must:

• Be a U.S. C-corporation
• Use at least 80% of its assets in active business operations
• Not fall within excluded categories such as:
  • Professional services (law, medicine, accounting)\
  • Banking, insurance, finance
  • Farming or natural resource extraction
  • Hospitality, hotels, and restaurants
  • Businesses primarily driven by employee skill or reputation

Passive investment companies also do not qualify.

How Is the QSBS Exclusion Calculated?

The IRS requires a two-step calculation, applied in the following order:

1. Dollar Limitation

• $10 million exclusion for stock purchased before July 4, 2025
• $15 million exclusion for stock purchased on or after July 4, 2025
• Inflation adjustments will begin after 2026
• Alternatively, investors can exclude up to 10× their aggregate stock basis, which is advantageous for founders contributing appreciated property

2. Percentage Limitation

Next, apply the exclusion percentage based on the holding period (50%, 75%, or 100%).

Tax Rates

• Gains limited by the percentage exclusion (i.e., non-excluded gains within the holding period bracket) are taxed at a special 28% federal rate
• Gains above the dollar limitation are taxed at regular capital gains rates.

Public Policy Considerations

Congress designed the QSBS exemption to encourage investment in early-stage U.S. businesses by rewarding long-term capital commitment. With the 2025 amendments, policymakers intend to:

• Modernize qualification thresholds
• Expand access to tax benefits for founders and investors
• Stimulate growth among innovative startups and emerging companies

The updated framework increases flexibility while maintaining guardrails to ensure that only genuine small businesses benefit from the exemption.

How Corporate Securities Legal LLP Can Assist

Corporate Securities Legal LLP is a boutique securities law firm based in Costa Mesa, California and New York City.

We advise startups, founders, and investors on the structuring, issuance, and tax implications of QSBS stock. Our practice is exclusively focused on securities law, including: Private and public offerings, corporate financings, Transactional structuring, SEC compliance and enforcement.

If you are forming a new corporation or planning a future exit, we can help you structure your stock issuances and corporate governance to maximize QSBS tax benefits.