QSBS Benefits Expanded Under Senate Finance Proposal

On June 16, 2025, the Senate Finance Committee released its own version of proposed legislation following the House’s passage of the “One Big Beautiful Bill Act” (H.R. 1). While the House bill did not introduce any changes to Section[1] 1202 for “qualified small business stock” (QSBS), the Senate Finance proposal introduces significant expansions of the tax benefits of QSBS acquired after the date of the enactment of the final legislation.

Summary of Current Law

The QSBS exemption allows noncorporate founders and investors in certain emerging growth companies that are C corporations to exclude up to 100% of the gain upon the sale or exchange of QSBS. The amount of gain eligible for exclusion is limited to the greater of $10 million or 10 times the taxpayer’s tax basis in the QSBS (as determined under the QSBS rules) issued by such corporation.

In order to qualify for the QSBS exclusion, (i) the stock must be acquired directly from the corporation at the time of its original issuance; (ii) the gross assets of the issuing corporation must not exceed $50 million at any time prior to or immediately after such issuance; (iii) the issuing corporation must satisfy the “active business” requirements during substantially all of the taxpayer’s holding period; and (iv) the taxpayer must hold the QSBS for more than five years.

Proposed Changes Under the Senate Finance Proposal

The Senate Finance Committee proposes three key changes:

Tiered-Gain Exclusion. The Senate Finance proposal would establish a tiered-gain exclusion for QSBS acquired after the date of enactment. There would be a 50% exclusion for QSBS held for at least three years (but less than four years), a 75% exclusion for QSBS held for at least four years (but less than five years), and a 100% exclusion for QSBS held for at least five years. QSBS gain is taxed at maximum capital gains rate of 28%, such that the effective US federal tax rate for QSBS under the Senate Finance proposal would be 15.9% (including the 3.8% Medicare tax on net investment income) for QSBS held for at least three years, and 7.95% (including the 3.8% Medicare tax on net investment income) for QSBS held for at least four years but less than five years. All such QSBS gain would be excluded as a preference item for purposes of the alternative minimum tax.

Increased Per-Issuer Cap. The $10 million gain exclusion cap would be increased to $15 million and would be adjusted for inflation beginning in 2027.

Increase in Aggregate Gross Assets Threshold. The Senate Finance proposal would increase the corporate-level gross asset threshold from $50 million to $75 million and would be adjusted for inflation beginning in 2027.

Effective Date

As noted above, the amendments to the QSBS provisions contained in the Senate Finance proposal would be effective for stock issued or acquired, and to tax years beginning on or after, the date of enactment of the final legislation. It is worth noting that as proposed, investments made in QSBS prior to the enactment of the legislation would still only benefit from the current per-issuer cap of $10 million even if such QSBS is sold after the date of enactment.

Implications

These proposed changes to the QSBS exemption would provide additional flexibility to founders of (and investors in) early-stage companies. Under current law, a founder that is presented with a potential exit opportunity prior to holding the QSBS for the requisite five years would need to weigh the benefits of such an exit against losing the entire QSBS exemption. With the Senate Finance proposal, the founder would still be eligible for at least partial gain exclusion after three years, allowing the founder to make an earlier exit with less draconian tax consequences.

Additionally, because Republican leadership has set a tight July 4 deadline (which is anticipated to slip further into the summer) to pass this new legislation, emerging companies that are currently exploring financing rounds that would push their corporate-level gross asset threshold above $50 million may consider delaying such financing until there is more clarity on the viability of this Senate Finance proposal in any final legislation.

Although the draft legislation remains uncertain, the Senate Finance proposal would represent a welcomed expansion of the QSBS incentives and make much needed changes for startups and the emerging company ecosystem.

Mintz will continue to monitor the process as it unfolds and will provide updates as appropriate.

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