Learn how recent changes to Qualified Small Business Stock (QSBS) under the OBBB Act could impact tax planning for C corporations, investors, and founders

The One Big Beautiful Bill (OBBB) Act includes a notable expansion of the Qualified Small Business Stock (QSBS) rules – already one of the most taxpayer-friendly provisions in the Internal Revenue Code. These changes could mean significantly lower capital gains taxes for founders, investors, and other stakeholders in qualifying businesses.

Background on QSBS

Section 1202 of the Internal Revenue Code allows non-corporate taxpayers, such as individuals and trusts, to exclude a portion or all the capital gain from the sale of QSBS if certain criteria are met. This can also apply when gains are realized through a pass-through entity.

QSBS refers to the capital stock of a domestic C corporation that:

• Had gross assets of $50 million or less at all times after August 10, 1993

• Was issued in exchange for non-stock property or as compensation for services

• Operates in a qualified trade or business (excluding fields like law, accounting, financial services, and farming)

Depending on the date of stock issuance, the exclusion rate ranges from 50% to 100%, up to the greater of $10 million or 10x the taxpayer’s basis in the stock. As always, the rules include many nuances, and careful planning is essential.

What’s New Under the OBBB Act?

The updated provisions now significantly enhance QSBS benefits:

• Shortened Holding Period: Now 3 years (down from 5)

• Expanded Company Size: Eligible corporations may now have gross assets up to $75 million

• Increased Exclusion Cap: The limit on capital gains exclusion has risen from $10 million to $15 million

Commentators note that such changes are a “significant expansion” of QSBS benefits, and these modifications broaden the appeal and increase QSBS relevance for private equity, founders, and other stakeholders. With a shorter path to tax-free gain, a larger range of qualifying businesses, and a bigger potential tax break, QSBS is more valuable than ever.

Implications for Business Formation and Strategy

These changes underscore the importance of evaluating QSBS eligibility early in a company’s life cycle, particularly when deciding on entity structure. The advantages of forming a C corporation have become increasingly compelling, and strategic use of QSBS should be part of any long-term planning conversation.

Next Steps

This overview is intended to highlight recent developments but does not cover all details or exceptions. We recommend a personalized review of your situation to determine how these changes could affect your tax and investment strategy.

Contact us today to discuss the new rules for QSBS.

The foregoing is intended to be marketing material. Information is contained in this article is for general education and knowledge. It is not designed to be and should not be substituted for legal advice. This information is not intended to create an attorney-client relationship.