The recently enacted “One Big Beautiful Bill Act” (OBBBA) pumped up an already strong incentive to invest in certain startups and other small businesses, the qualified small business stock (QSBS) exclusion under Section 1202 of the Internal Revenue Code. The OBBBA — signed into law on July 4, 2025 — made the QSBS exclusion more appealing by introducing three taxpayer-favorable changes: (1) a bigger gain exclusion cap per shareholder; (2) earlier savings under a multi-tiered holding period regime; and (3) a bigger gross asset limitation for businesses.
The primary benefit of the QSBS exclusion is that the shareholder holding QSBS can exclude millions of dollars of gain (or, if greater, 10 times the shareholder’s basis in the stock) when it sells QSBS. We previously discussed some of the basics of the QSBS exclusion and tax-planning opportunities. Read on for an overview of the OBBBA’s taxpayer-favorable changes to the QSBS exclusion.
Bigger Gain Exclusion Cap
The OBBBA increased the per-shareholder gain exclusion cap from $10 million to $15 million. For married taxpayers filing separate returns, the per-shareholder gain exclusion cap increased from $5 million to $7.5 million. The increased gain exclusion cap applies to QSBS issued after July 4, 2025. The $15 million cap is adjusted for inflation beginning in tax years after 2026.
Earlier Savings Under Multi-Tiered Holding Period
Under the OBBBA, a taxpayer can exclude a certain percentage of gain realized on the sale (or other disposition) of QSBS based on the number of years the taxpayer held QSBS. Before the OBBBA, the earliest opportunity to access tax savings was five years from issuance.
Upon the sale of QSBS, the taxpayer can now exclude: (1) 50% of gain realized after holding QSBS for at least three years; (2) 75% of gain realized after holding QSBS for at least four years; and (3) 100% of gain realized after holding QSBS for at least five years. The multi-tiered holding period rules apply to QSBS issued after July 4, 2025, and the excluded gain is still not treated as an alternative minimum tax preference item.
Bigger Gross Asset Limitation
The OBBBA increases the asset limitation on corporations considered to be qualified small businesses from $50 million to $75 million, with inflation adjustments beginning in tax years after 2026. Therefore, a corporation will be considered a qualified small business if it has less than $75 million in aggregate of (1) cash, (2) the fair market value of property contributed in the stock issuance (if any), and (3) the tax basis in the corporation’s other assets at the time of stock issuance. The increased asset limitation is effective for stock issued after July 4, 2025.
More corporations may now be eligible to issue QSBS, which can facilitate larger, later-stage financing rounds.
