More Companies, Bigger Exclusions, Faster Benefits: QSBS After the OBBBA
The One Big Beautiful Bill Act (OBBBA) became law on July 4, 2025. The OBBBA contained comprehensive changes to federal law, including a variety of modifications to the U.S. Internal Revenue Code (the “Code”). Among the many changes promulgated by the OBBBA, one of the most impactful for businesses, investors, and entrepreneurs is the changes in Code Section 1202. Code Section 1202 was one that received several modifications in efforts to modernize it by raising outdated dollar thresholds and allowing investors to tap into tax benefits in a shorter amount of time. These additions have significantly enhanced the tax benefits available to investors in Qualified Small Business Stock (QSBS) under Code Section 1202.
What is QSBS and Why Does it Matter?
QSBS generally refers to stock acquired at original issuance. Certain non-purchase transfers (e.g., gifts, some reorganizations, and rollovers subject to holding-period tacking) may preserve QSBS characterization; secondary-market purchases typically do not. For stock acquired at original issuance, the corporation must meet the following requirements:
- The issuer must be a U.S. C corporation at the time of issuance (and during substantially all of the holding period). Stock of foreign issuers is not QSBS.
- The aggregate gross assets of the corporation at all times on or after August 10, 1993, and before the issuance of the stock must not have exceeded $75,000,000 for stock issued after July 4, 2025, or $50,000,000 for stock issued on or before that date. Further, immediately after the issuance, the aggregate gross assets of the corporation (including amounts received in the issuance) must not exceed $75,000,000 for stock issued after July 4, 2025, or $50,000,000 for stock issued on or before that date.
- The corporation must meet the active business requirement, which means that at least 80% (by value) of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses, subject to specific look-through rules and limited safe harbors (e.g., for reasonable working capital and R&D). For this calculation, a corporation is deemed to own its ratable share of the assets of any subsidiary and to conduct its ratable share of the subsidiary's activities.
Section 1202 allows for a portion or the entirety of the capital gains to be excluded from the sale of QSBS.
Stock of corporations in certain lines of business doesn’t qualify as QSBS. Those businesses include, but are not limited to, banking, leasing, insurance, financing, investing, hotels, restaurants, oil and gas, and farming, plus personal service businesses in the fields of health, law, engineering, architecture, accounting, consulting, and brokerage. Whether a particular business is excluded is highly fact-specific and should be evaluated under Section 1202’s definitions.
What did the OBBBA Change?
The OBBBA introduced three major updates to the QSBS rules for Code Section 1202. First, it shortened the holding period, as investors can now qualify for QSBS tax benefits after holding the stock for just three years, rather than the previous five-year requirement.
OBBBA Changes*
Holding Period Applicable Exclusion
3 Years 50%
4 Years 75%
5 Years 100%
The shortened holding period introduced by the OBBBA applies only to QSBS acquired after July 4, 2025, the date the OBBBA was enacted. QSBS issued on or before that date remains subject to the original five-year holding requirement to qualify for exclusion on capital gains on the sale of QSBS. When determining the acquisition date of QSBS and what rate applies, any additional tacked holding period under Code Section 1223 is also taken into consideration and applied.
Second, the OBBBA changed the threshold for a corporation’s gross assets to qualify as an entity eligible to issue QSBS from $50 million to $75 million, with annual adjustments for inflation. This significantly expands the pool of companies that now qualify as “small businesses” under Code Section 1202 and that are now able to issue QSBS. The $75 million gross-asset limit is subject to cost-of-living adjustments as provided in the statute. Actual increases may vary by year.
Third, the OBBBA increased the maximum capital gain exclusion per issuer from $10 million to $15 million. For any tax years after the date of enactment of the OBBBA, eligible taxpayers are permitted to exclude capital gains from the sale of QSBS up to $15 million or 10 times the adjusted basis of the taxpayer in the QSBS. Like the adjustment for gross asset value limitation, the $15 million per-issuer cap is subject to cost-of-living adjustments (beginning in 2027) as provided in the statute.
The changes to Code Section 1202 enacted under the OBBBA are a significant expansion of QSBS tax benefits made available to investors, shareholders, entrepreneurs, and other eligible taxpayers acquiring stock of qualifying C Corporations. These recent changes significantly enhance the potential benefits for investors and entrepreneurs who consider QSBS qualification early on in a company’s life cycle. Key decisions such as entity choice, capital structure, and planning future transactions can help a company leverage the most out of changes to Code Section 1202.
If you have any questions about changes to Code Section 1202, how your business can leverage these changes, or any other QSBS inquiries, please reach out to the Bricker Graydon Wyatt Corporate and Tax Team.
