July 15, 2025

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act ("OBBBA") into law. Among its many tax-related provisions, the legislation significantly expands the tax benefits available under Section 1202 of the Internal Revenue Code for holders of Qualified Small Business Stock ("QSBS"). These enhancements apply to QSBS acquired on or after July 5, 2025, and may offer substantial tax planning opportunities for founders, early-stage investors, and growth-stage companies.

Understanding the QSBS Exclusion – Pre-OBBBA

Before the OBBBA, Section 1202 allowed certain noncorporate taxpayers to exclude up to 100% of the capital gain from the sale or exchange of QSBS—stock in eligible C corporations—if specific conditions were met. The exclusion was subject to the greater of:

• $10 million, or
• 10 times the taxpayer’s basis in the QSBS.

To qualify for the QSBS exclusion:

• The stock must have been acquired directly from the corporation at original issuance.
• The corporation must have had gross assets not exceeding $50 million at issuance.
• The corporation must have conducted an active business for substantially all of the holding period.
• The taxpayer must have held the QSBS for more than five years.

Please refer to our previous Insight for more infomratoin concerning the pre-OBBBA Section 1202 rules here. 

Key Changes to QSBS Under the OBBBA

The OBBBA introduces three notable enhancements to Section 1202 for QSBS acquired on or after July 5, 2025:

Tiered Exclusion Based on Holding Period: The OBBBA replaces the all-or-nothing five-year rule with a graduated exclusion schedule:

Importantly, QSBS gain is excluded from the Alternative Minimum Tax (AMT) regardless of holding period.

Increased Gain Exclusion Cap: For QSBS acquired after July 4, 2025, the gain exclusion cap increases to $15 million per issuer (up from $10 million), and this amount will be indexed for inflation beginning in 2027.

Higher Gross Asset Threshold: The issuing corporation’s gross asset limit is raised from $50 million to $75 million, also subject to inflation adjustments starting in 2027. Furthermore, newly reinstated bonus depreciation and immediate expensing of R&D expenditures may help businesses stay under this expanded threshold.

Effective Date and Transition Considerations

These changes are effective for:

• QSBS acquired or issued on or after July 5, 2025, and
• Tax years beginning after July 4, 2025.

There are important caveats for transitioning from the old rules to the new ones:

No Reset via Exchange: Taxpayers cannot reset their acquisition date to post-July 5, 2025 by engaging in a stock-for-stock exchange or rollover under Section 1045. Carryover holding periods must be preserved.

Cap Applies Based on Acquisition Date: QSBS acquired before July 5, 2025 remains subject to the $10 million gain exclusion cap, even if sold after the new law takes effect.

Mixed Rule Applicability: A single corporation may issue QSBS under both the $50 million and $75 million thresholds, depending on the timing. Investors and companies must maintain clear records to properly apply the relevant rules.

Strategic Implications

• The expansion of QSBS benefits under the OBBBA offers significant tax planning advantages for early-stage investors, founders, and startups:
• Founders and angel investors can benefit from partial exclusions earlier in the holding period, increasing flexibility around exit timing.
• Startups may have an extended window to issue QSBS before reaching the higher $75 million threshold.
• Growth-stage companies may find it easier to attract investment with enhanced QSBS incentives.

How We Can Help

If you are an entrepreneur, investor, or executive navigating QSBS planning, our tax attorneys can assist with:

• QSBS eligibility assessments
• Pre- and post-issuance planning
• Cap table and exit strategy optimization
• Recordkeeping compliance

Contact Gilpin Givhan today to ensure you are well-positioned to take full advantage of these expanded QSBS benefits.