Key Takeaways:
- On July 4, 2025, “The One Big Beautiful Bill Act” (the “Act”) was signed into law, introducing significant expansions of the tax benefits of “qualified small business stock” (“QSBS”) issued on or after July 5, 2025.
- The Act introduced three key changes to the rules for QSBS issued on or after July 5, 2025:
- Loosening the aggregate gross asset test for determining which corporations can issue QSBS, by increasing the applicable threshold.
- Increasing the amount of eligible gain on the sale or exchange of QSBS that is excludible from income.
- Decreasing the amount of time that QSBS must be held to qualify for some level of gain exclusion.
On July 4, 2025, “The One Big Beautiful Bill Act,” Pub. L. No. 119-21, was signed into law, introducing significant expansions of the tax benefits of “qualified small business stock” issued on or after July 5, 2025.
Overview of QSBS Rules
Under the QSBS rules, if (1) an eligible U.S. “C” corporation (2) that actively operates a “qualified small business” (3) originally issues its stock to a noncorporate taxpayer (4) in exchange for money, other property (not including stock) or as compensation for services, and (5) prior to, and immediately after, such issuance, the corporation’s aggregate gross asset value falls below the applicable threshold, and (6) the taxpayer holds the stock for the applicable holding period, then (subject to certain other requirements) the taxpayer generally can exclude some or all of the amount of eligible gain from the sale or exchange of QSBS.
The determining factor with respect to the percentage of gain from the sale or exchange of QSBS that can be excluded from a taxpayer’s gross income (and, therefore, not subject to federal taxation) is the date on which the QSBS was issued, as summarized in the following chart (which takes the Act into consideration):
If the applicable QSBS exclusion percentage is 100%, then the entire amount of eligible gain is excluded from the taxpayer’s income and, therefore, is not subject to federal tax.
If the applicable QSBS exclusion percentage is 50% or 75%, then the portion of eligible gain that remains subject to tax (i.e., 50% or 25%, respectively) is subject to federal tax at a blended rate of 31.8% (i.e., a special 28% federal income tax rate under the QSBS rules, plus the 3.8% net investment income tax rate). The “QSBS Effective Tax Rate” in the foregoing table is not 31.8%; rather, the “effective” rate is based on ratio of the special rate as a percentage of total gain from the sale or exchange of QSBS.
The “QSBS Effective Tax Rates” do not apply to gains realized in excess of the maximum gain eligible for exclusion (see further discussion below). The “Effective Tax Rate if the QSBS Rules do not Apply” column in the above chart assumes a 20% long-term capital gain rate and additional net investment income tax of 3.8%.
The rates in the chart above also do not take into account any alternative minimum tax add-back applicable to eligible gains from the sale of QSBS acquired before September 28, 2010.
Changes Effective July 5, 2025
The Act introduced three key changes to the QSBS rules:
These changes would provide greater flexibility and planning opportunities to founders and investors of emerging companies and expand the potential number of qualifying small businesses that may benefit from the QSBS rules.
For our prior alert summarizing certain matters relating to QSBS prior to the Act, click here.
