The One Big Beautiful Bill Act (the “OBBBA”), which was signed into law on July 4, 2025, contained a big, beautiful surprise for qualified small business stock (“QSBS”) investors. Individual investors, private equity funds and venture capital funds alike frequently apply the QSBS rules as a popular tax-advantaged investment strategy. This Memorandum discusses how the OBBBA expands QSBS tax incentives and how investors and funds can take advantage of the new rules.
The OBBBA modifies the QSBS rules in three ways. For original issuances of QSBS occurring after July 4, 2025, the OBBBA (1) reduces holding period requirements, (2) increases the per-issuer dollar cap on sheltered gain, and (3) increases the ceiling on gross assets permitted to qualify as a qualified small business.
First, the holding period changes are favorable to taxpayers. Under prior law, a QSBS investor must hold its stock for more than five years to get the benefit of gain exclusion. Holding periods for five years or less would not be eligible for the potential gain exclusion. The OBBBA changes permit taxpayers to hold QSBS for at least three years but less than four years and enjoy a 50% gain exclusion. The gain exclusion percentage increases to 75% when the holding period is at least four years but less than five years, and increases to 100% where the holding period is at least five years. Any gain recognized by taxpayers taking advantage of the 50% or 75% exclusions will be taxed at 28% (plus the 3.8% Medicare tax), for an effective tax rate of 15.9% with the 50% exclusion and 7.95% with the 75% exclusion. The new holding period rules apply to new issuances of QSBS acquired after July 4, 2025.
Second, the QSBS rules impose two caps on the amount of gain a taxpayer may exclude on a sale or disposition of the QSBS of a particular issuer, based on the greater of: (1) a per-issuer cap (set at $10 million under prior law) in the aggregate for current and prior years, and (2) a cap based on ten times the aggregate tax basis of QSBS sold by a taxpayer in a given tax year. For new issuances of QSBS acquired after July 4, 2025, the OBBBA increases the per-issuer cap to $15 million and includes annual inflation adjustments starting in 2027. Taxpayers fully utilizing the inflation-adjusted per-issuer limitation in any tax year are not eligible for additional exclusions based on subsequent inflation adjustments.
Third, under prior law, which still applies to issuances of QSBS on or prior to July 4, 2025, an issuer’s gross assets could not exceed $50 million to be a qualified small business. The OBBBA increases this amount to $75 million with respect to QSBS issuances after July 4, 2025, and is indexed for inflation starting in 2027. Such an increase will permit more businesses to qualify as “qualified small businesses” for purposes of QSBS investments and in turn, benefit both the businesses issuing stock and investors seeking tax benefits.
These OBBBA changes expand the pool of potential corporations that can issue QSBS. In certain circumstances, funds and investors that own historic stock that is not treated as QSBS under prior law but would be QSBS under the OBBBA may seek newly issued stock from those companies that is QSBS eligible. While the new stock may benefit from the new QSBS treatment, the holding period would restart. Funds and investors that own QSBS acquired after July 4, 2025, will also have more flexibility from a tax perspective to liquidate their positions sooner than the prior five-year holding period requirement and benefit from the new gain exclusions.
