Qualified Small Business Stock Benefits Expanded in New Tax Bill
The One Big Beautiful Bill Act expands the qualified small business stock benefits available to founders and investors.
The One Big Beautiful Bill Act ("OBBB") passed earlier this month introduces three major updates to the qualified small business stock ("QSBS") rules under Internal Revenue Code section 1202. Section 1202 encourages investment in small businesses by exempting individuals from federal income tax on up to 100% of the otherwise-taxable gain recognized on the sale of QSBS. The recent OBBB changes expand the QSBS tax benefits available, and make them easier to access. Notably, however, these more favorable rules apply only to eligible stock issued after July 4, 2025.
Increased Benefit
Previously, the maximum amount of gain eligible for the QSBS exclusion was generally limited to $10 million or 10 times the shareholder's tax basis in the relevant stock. As amended, that $10 million limit has been increased to $15 million, potentially giving shareholders a larger tax benefit. And beginning in 2027, the $15 million will be adjusted annually for inflation.
Relaxed Holding Period Requirement
Under prior law, investors were required to hold their qualifying stock for at least five years to receive the QSBS benefit. The OBBB relaxes this requirement by adopting a tiered system: A shareholder can exclude 50% of eligible gain after holding the stock for three years, 75% after four years, and then 100% after five years.
Qualified Small Businesses Can Now Be Larger
Under the old QSBS rules, the value of the small business corporation (and, specifically, the value of its aggregate gross assets) could not exceed $50 million at the time the relevant stock was issued. Under the amended rules, that threshold increases to $75 million, thus allowing larger companies to qualify. Starting in 2027, this valuation limit will also be indexed to inflation.
Overall, these favorable changes offer more opportunities for founders and investors to take advantage of QSBS benefits. In some cases, these increased QSBS benefits may affect the choice of entity for new ventures, although existing strategies for maximizing QSBS benefits will continue to be available. Affected companies and their investors will, however, want to ensure good recordkeeping when a company has issued equity subject to both the previous and updated QSBS regimes.
