QSBS Changes Under the One Big Beautiful Bill Act

Lara Sass
1 day ago
4 min read

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, marks the most significant reform of Qualified Small Business Stock (QSBS) rules in over a decade.

This legislation fundamentally changes how founders, early investors, and their families can leverage QSBS to reduce capital gains tax, while simultaneously creating new opportunities and potential pitfalls for corporate planning.

As background, Section 1202 of the Internal Revenue Code (IRC) promotes investment in certain small businesses by enabling investors to exclude eligible capital gains from QSBS. This provision provides an immense opportunity for founders and investors of small businesses in fields such as technology, retail, and manufacturing to exclude up to 100% of eligible capital gains.

To qualify for QSBS exclusions, various requirements must be met. Under the pre-OBBBA rules, if these eligibility requirements are satisfied (including the taxpayer having held the stock for at least five years before the sale or exchange), taxpayers are able to file for gain exclusions of up to $10 million.

For both estate planning and corporate/M&A purposes, understanding the changes is critical.

Key QSBS Changes Under OBBBA

The OBBBA introduces three central reforms for QSBS acquired after July 4, 2025:

1. Tiered Gain-Exclusion System

50% exclusion if the stock is held for 3 years
75% exclusion if held for 4 years
100% exclusion if held for 5 years

This partial-exclusion regime allows founders and investors to realize gains earlier while still capturing significant tax benefits.

2. Increased Per-Taxpayer Exclusion Cap

Raised from $10 million to $15 million per taxpayer, per issuer, or 10x the stock basis, whichever is greater
Indexed for inflation starting in 2027

This higher cap allows families and investors to shelter larger amounts of gain from taxation.

3. Expanded Small Business Eligibility

Aggregate gross asset limit increases from $50 million to $75 million, with inflation adjustments beginning in 2027
More growth-stage companies qualify, extending opportunities for QSBS treatment and tax planning

Important: Stock acquired on or before July 4, 2025 remains subject to the pre-OBBBA rules: 100% exclusion after five years and a $10 million cap. Attempting to “refresh” pre-Act QSBS to take advantage of new rules is generally prohibited under anti-reset regulations.

QSBS Requirements Recap

For QSBS to qualify under IRC §1202, the following conditions must be met:

The stock must be held for at least five years before sale (to achieve full exclusion).
Stock must be issued originally in exchange for money, property, or services, not in secondary transactions.
The business must be a qualified C corporation at issuance and throughout the holding period.
At least 80% of assets must be used in an active qualified trade or business.
Total assets prior to issuance must be less than $50 million (pre-OBBBA) or $75 million (post-OBBBA).
No significant stock repurchases can occur within specific windows surrounding issuance.

When these rules are met, taxpayers may claim up to $10 million (or higher under OBBBA) in capital gains exclusion.

Implications for Estate Planning

QSBS is not just a corporate tax tool; it’s a powerful estate planning strategy:

1. Multiplying Exclusions Across Family Members

Because the exclusion applies per taxpayer, gifting stock to nongrantor trusts or individual family members can dramatically multiply total gain exclusions (“stacking”).
Grantor trusts, however, do not create separate taxpayers for IRC §1202 purposes, so only nongrantor structures achieve stacking.

2. Earlier Diversification Options

Partial exclusions at 3 or 4 years allow founders and families to diversify holdings earlier while still extracting substantial tax-free gains.

3. Planning Around Larger Companies

The $75 million asset cap means more companies remain eligible for QSBS treatment, giving founders additional runway to implement gifting or trust strategies before the issuer grows out of eligibility.

4. Coordination with Other Planning Tools

QSBS strategies should be considered alongside valuation practices, federal and state estate tax exemptions, charitable planning, and broader family governance goals.

Corporate and M&A Implications

The OBBBA also reshapes corporate planning and exit strategies:

1. Raising Capital

The higher $75 million threshold allows companies to raise additional equity without breaching QSBS eligibility, extending growth-stage fundraising opportunities.

2. Nuanced Deal Structuring

The tiered exclusion system introduces flexibility in M&A planning.
Founders could structure sales in years 3 or 4 with adjustments for partially taxable portions or roll over gains into replacement QSBS under IRC §1045.

3. Compliance Is Critical

Original issuance, redemption restrictions, and active business tests remain strictly enforced.
Secondary purchases do not confer QSBS status, and restricted stock typically begins its holding period at vesting unless an 83(b) election is made.
Asset sales followed by liquidation usually destroy QSBS eligibility, so careful diligence is required in corporate transactions.

4. Due Diligence in M&A

QSBS compliance, asset-test eligibility, redemption history, and representations/warranties should be explicitly addressed in transaction documents to preserve benefits.

Strategic Takeaways

The OBBBA does not change the fundamental principle of QSBS: investing in eligible C corporations can provide substantial tax incentives.

What has changed is the planning horizon:

Track acquisition dates and holding periods meticulously.
Document compliance with QSBS requirements.
Coordinate corporate and estate planning early to maximize benefits.

For founders, investors, and families, the OBBBA provides new avenues for tax-efficient transfers, earlier diversification, and greater flexibility in estate and corporate planning.