The One Big Beautiful Bill Act (“OBBBA”), signed into law on July 4, 2025, introduced a number of significant amendments to the Internal Revenue Code. Among the OBBBA’s most notable changes are the revisions to Section 1202 of the Internal Revenue Code, which governs the exclusion of gain realized from the sale of Qualified Small Business Stock (“QSBS”).
These revisions (1) reduce the minimum QSBS holding period required to benefit from Section 1202; (2) increase the per-shareholder limitation on gain eligible for favorable treatment under Section 1202; (3) increase the gross asset limitation applicable to determining whether a corporation is a qualified small business; and (4) provide for inflation adjustment to the per-shareholder limitation and the gross asset limitation.
Overview of the QSBS Rules Prior to the OBBBA
Investors and founders receiving QSBS prior to July 5, 2025, may exclude up to 100% of the gain from the sale of QSBS held for more than five years, subject to a cap equal to the greater of $10 million or 10 times the taxpayer’s adjusted basis in the corporation’s QSBS sold during the taxpayer’s taxable year. To qualify for the exclusion or partial exclusion, the stock must have been issued by a C corporation in exchange for money, property (excluding stock) or as compensation for non-underwriting services, and the issuer must have had not more than $50 million in gross assets at any time after August 10, 1993, and prior to the issuance of the stock or immediately following the receipt of any proceeds from the issuance of such stock. Certain other qualifications (including type of business and redemptions by the issuing corporation) must be satisfied.
OBBBA Amendments
The cap for investors and founders on preferential treatment for gain from sale of QSBS received on or after July 5, 2025, has been increased to the greater of $15 million (adjusted for inflation) or 10 times the taxpayer’s adjusted basis in the corporation’s QSBS sold during the taxpayer’s taxable year. The percentage of such gain that may be excludible depends on the holding period for the QSBS:
- For QSBS held for at least three years but not four or more years, a taxpayer may exclude 50% of such gain.
- For QSBS held for at least four years but not five or more years, a taxpayer may exclude 75% of such gain.
- For QSBS held for five or more years, a taxpayer may exclude 100% of such gain.
While most of the qualification requirements for determining whether stock is QSBS have not changed, the $50 million gross asset limitation has increased to $75 million and will be adjusted for inflation going forward.
Implications for Investors and Founders
The OBBBA enhancements to the QSBS regime provide investors with greater flexibility in exit timing and may allow investors to receive QSBS from investments in more mature companies. Founders should also consider potential QSBS benefits available when issuing equity to themselves or to early-stage key employees. Maximizing the QSBS benefits available requires careful planning — and investors, founders and other stakeholders should evaluate how they may take advantage of these revised rules.
