Qualified Small Business Stock Changes: Higher Caps, Shorter Holding
Tucked within the One Big Beautiful Bill (OBBB) Act is a meaningful update to the tax code: revisions to the Qualified Small Business Stock (QSBS) gain exclusion under Section 1202. Long used as a tool to encourage innovation and investment in early-stage businesses, the QSBS rules have now been clarified and expanded.
The changes are unlikely to make headlines. But for founders, investors, and those structuring or exiting C corporations, the implications are real. Eligibility may broaden, planning opportunities may increase and, in some cases, strategies once dismissed as too uncertain may deserve another look.
Two Paths Forward, One Longstanding Policy
The Qualified Small Business Stock (QSBS) exclusion has been part of the tax code since 1993. It was designed to steer capital into early-stage, innovative C corporations and has held bipartisan support for decades. Under the original rules, investors could exclude the greater of $10 million in gain or 10 times their basis in qualifying stock provided they met strict requirements including a five-year holding period and a $50 million gross asset test at the time of issuance. Certain industries, such as finance, professional services, and hospitality, remain ineligible.
The new QSBS provisions under the OBBB Act apply only to stock issued on or after July 4, 2025. This means that two sets of rules will now run in parallel. Stock issued before the law’s effective date remains subject to the original framework. Stock issued after may be eligible for shorter holding periods, a higher gain exclusion, and a more generous asset threshold.
This dual structure introduces both complexity and opportunity. Founders and early investors with a clear view of their ownership timeline may be able to align future issuances with the more favorable terms under the new law while continuing to benefit from the grandfathered treatment of legacy stock.
What Has Changed Under OBBBA
The OBBB Act leaves the foundational elements of Section 1202 intact but adds several new features designed to increase flexibility and widen participation:
- Effective Date. Applies only to QSBS issued on or after July 4, 2025. Stock issued before this date remains under the legacy rules.
- Shorter Holding Period. Investors can now qualify for a partial exclusion after holding stock for just three years. The exclusion scales with time held:
| Holding Period | Exclusion |
| Three Years | 50 Percent |
| Four years | 75 Percent |
| Five years | 100 Percent |
- Higher Gain Exclusion Cap. The $10 million exclusion cap has been raised to $15 million per taxpayer, potentially allowing greater tax-free gains for qualifying investments.
- Expanded Asset Threshold. The maximum asset threshold for qualifying businesses has been raised, although the new limit has not yet been formally clarified by the IRS. This could allow larger, later-stage startups to qualify if other conditions are met.
Planning Opportunities and Why Strategy Matters
Because the $10 million QSBS exclusion applies per shareholder, per issuer, AAFCPAs encourages clients to consider strategies that can multiply this benefit. Gifting shares or creating trusts may allow families to preserve more wealth across generations, while multiple shareholders in the same company can each claim their own exclusion.
Founders and early investors, including option holders (may impact timing of exercise), should assess eligibility well before stock is issued or a liquidity event occurs. Waiting until the exit stage narrows planning options. Modeling potential exclusions early, confirming qualification, and avoiding missteps—like entity restructuring or lapses in the active business requirement—can make all the difference.
QSBS remains one of the most valuable tax planning tools available to startups and early investors. AAFCPAs advises clients to engage early with our tax advisors, who understand the nuances of Section 1202, and to coordinate with legal counsel to help preserve eligibility throughout the stock’s lifecycle.
How We Help
AAFCPAs advises clients at every stage of business growth to evaluate the tax implications of stock issuance, corporate structure, and liquidity events. Our business tax advisory team, including consulting tax attorneys and wealth advisors, works closely with founders, option holders, CFOs, and boards to model QSBS eligibility, coordinate timing strategies, and ensure compliance with both the original and revised Section 1202 rules. We help clients assess entity choice, navigate the 80 percent active business test, and structure ownership in ways that may preserve or multiply the available gain exclusion.
In parallel, AAFCPAs’ business transaction advisory team supports clients through complex events such as equity raises, recapitalizations, or exits. We bring together transaction tax depth, financial due diligence, and deal structuring to help clients prepare, position, and execute with confidence. Whether planning a sale or accepting outside capital, clients benefit from integrated advice that considers both the financial and tax dimensions of every decision.
These insights were contributed by Joshua England, LLM, Esq., Partner & Tax Attorney, Daniel Seaman, CPA, Tax Partner, AAF Wealth Management, and Richard Weiner, CPA, MST, CM&AA, Tax Partner.
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