Enacted on July 4, 2025, the One Big Beautiful Bill Act (the Act) expands the scope of Qualified Small Business Stock (QSBS) benefits under Section 1202 of the Internal Revenue Code (Section 1202). The new provisions apply to stock acquired after July 4, 2025, while the pre-Act QSBS framework (described below), including the 100 percent exclusion, $10 million cap, and $50 million gross asset ceiling, remains unchanged for stock acquired before that date.
What Is QSBS and the Pre-Act Framework
QSBS under Section 1202, known as the qualified small business stock gain exclusion, has long been a valuable tax incentive for founders and investors in early-stage companies. When certain requirements are met, Section 1202 allows a shareholder to exclude up to 100 percent of the gain realized from selling stock of a qualifying corporation. For founders and early investors, this often results in substantial tax savings and has been a major consideration in structuring and exiting startups formed as C-Corporations.
To qualify, the stock must be issued by an entity that is taxed as a C-Corporation with gross assets of $50 million or less at the time of issuance. The stock must be acquired by a non-corporate taxpayer at original issuance, held for more than 5 years, and the corporation must be engaged in an active business, excluding certain industries. For many startup clients including founders, angel investors, and venture funds, Section 1202 is a key part of long-term equity and exit planning.
What has Changed in the Recent Legislation
The Act expands and modernizes the QSBS rules for stock issued on or after July 4, 2025. These updates make QSBS treatment more accessible and valuable for founders, early employees, and investors. Three primary changes were introduced.
- Tiered Exclusion for Capital Gains
Under prior law, QSBS had to be held for at least 5 years to qualify for any exclusion. The Act introduces a new tiered structure that allows partial exclusion earlier. Taxpayers can now exclude the following amounts of gain:
- 50 percent after a 3-year holding period
- 75 percent after a 4-year holding period
- 100 percent after a 5-year holding period
This change provides greater flexibility in choosing an exit at a time when market conditions may be more favorable or as an opportunity arises to do so, and allows investors to benefit from partial exclusions at the time of such an exit, sooner than the original 5-year all or nothing holding period requirement.
- Increased Cap on Tax-Free Gain
Previously, the amount of gain eligible for exclusion was limited to the greater of $10 million or 10 times the shareholder’s adjusted basis. Under the new rules, the cap increases to the greater of $15 million (and such amount will be indexed to and increased annually for inflation) or 10 times the adjusted basis. This expansion provides more favorable tax treatment and better reflects the modern startup landscape by benefiting the founders, angels, and other smaller basis investors who would be more likely to use the dollar value threshold and not the 10 times basis cap.
- Higher Qualified Small Business Asset Threshold
Before the Act, a corporation was ineligible for QSBS treatment if its gross assets exceeded $50 million before or immediately after the stock issuance. The new law raises this threshold to $75 million, which amount will also indexed to and increased for inflation. This change allows for shares issued by more companies to qualify for QSBS status in future years and encourages further investment in growing and emerging businesses.
Conclusion
The One Big Beautiful Bill Act expands and enhances the QSBS framework, making it more generous and accessible for founders, investors, and startups alike. By raising thresholds, allowing earlier gain exclusions, and incorporating inflation adjustments, the new rules enhance Section 1202 as a valuable resource for fostering startup growth and effective tax planning.
At Newman & Lickstein, we regularly advise founders, investors, and emerging companies on QSBS planning from formation through funding and exit. Please contact us to discuss how these changes may affect your situation.
