On June 16, 2025, the Senate Finance Committee introduced a bill that would significantly expand the benefits available for qualified small business stock (QSBS). The expanded QSBS benefits apply to stock acquired after the enactment of the bill (the “Applicable Date”), while leaving the existing QSBS benefits unchanged for stock acquired on or before the Applicable Date.
As a result of this development, parties that are near completion of transactions with QSBS implications should carefully consider postponing closing until there is more clarity on the potential law changes. The following chart summarizes the two different sets of QSBS rules that would apply depending on when the stock in question was acquired:
Observations:
- Because the holding period requirement is reduced to three years, founders and investors may be able to achieve liquidity before five years while still benefiting from QSBS treatment. However, given the tiered system for gain exclusion, there remains an incentive to hold the stock for five years or more to maximize the exclusion.
- While the proposed changes generally apply to stock acquired after the Applicable Date, the increase in the gross asset test appears to apply to all corporations. Therefore, corporations that previously exceeded the $50 million threshold but have not yet exceeded $75 million may have an opportunity to issue additional QSBS-eligible stock if the changes are enacted.
- Given that different QSBS rules will apply depending on when the stock was acquired and how long it has been held, recordkeeping will become even more important. For example, in an M&A transaction involving a partial rollover with stock acquired at different times, it may be important to designate specified shares to ensure proper tax treatment.
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