Significant and Positive changes to QSBS in the One Big Beautiful Bill Act
- The CFO Office
- Jul 4, 2025
- 2 min read
The "One Big Beautiful Bill Act" (OBBBA) is set to dramatically expand the tax benefits associated with Qualified Small Business Stock (QSBS). While previous legislative attempts, such as the 2021 "Build Back Better Act," sought to curtail these popular incentives, the OBBBA swings the pendulum firmly in the opposite direction, promising greater exclusions and broader applicability for qualifying investments.
For years, Internal Revenue Code Section 1202, governing QSBS, has been a powerful tool for encouraging investment in small businesses. It allows non-corporate taxpayers to exclude up to 100% of the capital gains from the sale of qualifying stock, provided certain conditions are met.
Under current law (for stock acquired after September 27, 2010), this exclusion is capped at the greater of $10 million or 10 times the taxpayer's basis in the stock, and requires a five-year holding period. Crucially, the issuing company must have had gross assets of no more than $50 million at the time of stock issuance.
The OBBBA introduces three key enhancements that will apply to QSBS acquired after the bill's enactment date:
Tiered-Gain Exclusion and Reduced Holding Periods: The current "all-or-nothing" five-year holding period for a 100% exclusion is being replaced with a more flexible, tiered system:
50% exclusion for QSBS held for at least three years.
75% exclusion for QSBS held for at least four years.
The 100% exclusion remains for QSBS held for at least five years.
This tiered approach provides investors with partial tax benefits even if an exit opportunity arises before the traditional five-year mark, offering increased liquidity and reduced risk.
Increased Per-Issuer Cap: The existing $10 million gain exclusion cap, which has remained unchanged since QSBS's inception in 1993, will be raised to $15 million.
This increased cap will be adjusted for inflation starting in 2027, allowing for even greater tax-free gains as companies mature. This is particularly beneficial for founders and early employees who often have a very low basis in their stock.
Expanded Aggregate Gross Assets Threshold: The corporate-level gross asset limit, which currently stands at $50 million, will be increased to $75 million. Like the per-issuer cap, this threshold will also be indexed for inflation from 2027 onwards.
This expansion broadens the universe of companies that can qualify as a "small business" for QSBS purposes, encompassing a wider range of emerging growth companies and potentially even later-stage startups.
These changes represent a significant win for the startup ecosystem. OBBBA aims to incentivize more capital flow into innovative, job-creating businesses across the nation. The reduced holding periods offer a crucial level of flexibility that was previously lacking, potentially encouraging more strategic early exits without forfeiting all tax advantages.
These QSBS enhancements stand out as a clear signal of legislative intent to foster entrepreneurship and economic growth through targeted tax incentives. As businesses and investors digest the details of this new legislation, professional tax advice will be paramount to fully leverage these expanded benefits.
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