The One Big Beautiful Bill Act, signed into law on July 4, 2025, brings sweeping changes to the tax code, including significant updates to the Qualified Small Business Stock (QSBS) provisions. Here’s what founders, investors, and their advisors need to know:
The new law makes QSBS even more attractive for founders and investors in startups and small businesses. Key changes include:
• Tiered Gain Exclusion: Previously, investors could exclude up to 100% of capital gains on QSBS held for more than five years (subject to certain limits). No gain exclusion was allowed for QSBS held less than five years. Now, for QSBS acquired after July 4, 2025, a tiered system applies that provides:
- 50% exclusion for stock held at least 3 years but less than 4 years
- 75% exclusion for stock held at least 4 years but less than 5 years
- 100% exclusion for stock held 5 years or more
• Gain Exclusion Floor Increased from $10 million to $15 million: Under prior law, gain exclusion was limited to the greater of $10 million or 10 x the taxpayer’s adjusted gross basis in the shares, with $10 million effectively being the floor for how much gain could be excluded. Under the new law, that floor has been increased to $15 million (indexed for inflation) for stock acquired after July 4, 2025, potentially allowing taxpayers to exclude more gain and pay less taxes on successful exits. In some cases, these gain exclusion limits can be multiplied by gifting stock to heirs in irrevocable trusts prior to an exit.
• Expanded Eligibility for Larger Companies: The maximum “aggregate gross assets” threshold for a company to qualify as a qualified small business increases from $50 million to $75 million (also indexed for inflation), enabling some companies that did not qualify under the previous rules to issue QSBS.
All other requirements for QSBS treatment remain the same, including the following:
• Original Issuance: The stock must be acquired at original issuance from the corporation, in exchange for money, property (not other stock), or as compensation for services.
• Active Business Requirement: During substantially all of the shareholder’s holding period, at least 80% of the corporation’s assets (by value) must be used in the active conduct of a “qualified trade or business.” Many service businesses (e.g., law, accounting, health, finance, hospitality) are not considered qualified trade or service businesses.
• Eligible Taxpayers: Only non-corporate taxpayers (individuals, trusts, and certain pass-through entities) can claim the QSBS exclusion.
• Documentation: The IRS is expected to scrutinize QSBS claims more closely. Founders and investors should maintain thorough records and obtain QSBS attestation from the issuing corporation.
Takeaways:
Because QSBS treatment is only available for C corporations, founders and their advisors should strongly consider C corporation status for companies in high-growth industries to allow for QSBS eligibility.
Additionally, high-growth companies not currently organized as C corporations that are three or more years out from a liquidation event should consider converting to C corporation status if they otherwise qualify for QSBS treatment. Many companies that would not have qualified under the old rules will now qualify with the increased aggregate gross asset limit.
These changes apply only to stock issued after the law’s enactment date. Stock acquired on or before July 4, 2025, remains subject to the old rules. Additionally, California and some other states do not conform to federal treatment for QSBS.
For more information on how to take advantage of this expanded tax exclusion for QSBS, feel free to contact Brown & Streza for a consultation.
