QSBS Benefits Expanded Under One Big Beautiful Bill Act

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (OBBBA), which included revisions to Section[1] 1202 for “qualified small business stock” (QSBS) unchanged from those initially introduced in the Senate version of the bill. The expansion of benefits applies to QSBS acquired after July 4, 2025.

Summary of Pre-OBBBA 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, (1) the stock must be acquired directly from the corporation at the time of its original issuance; (2) the gross assets of the issuing corporation must not exceed $50 million at any time prior to or immediately after such issuance; (3) the issuing corporation must satisfy the “active business” requirements during substantially all of the taxpayer’s holding period; and (4) the taxpayer must hold the QSBS for more than five years.

Changes Under the OBBBA

The OBBBA contains three key changes to the QSBS rules:

Tiered-Gain Exclusion. The OBBBA establishes a tiered-gain exclusion for QSBS acquired after July 4, 2025:

• For QSBS held for at least three years (but less than four years): 50% exclusion taxed at a 15.9% effective US federal tax rate[2]
• For QSBS held for at least four years (but less than five years): 75% exclusion taxed at a 7.95% effective US federal tax rate
• For QSBS held for at least five years: 100% exclusion

All such QSBS gain would be excluded as a preference item for purposes of the alternative minimum tax.

Increased Per-Issuer Cap. The gain exclusion cap is $15 million (increased from $10 million), adjusted for inflation beginning in 2027, for QSBS acquired after July 4, 2025.

Increased Aggregate Gross Assets Threshold. The corporate-level gross asset threshold is $75 million (increased from $50 million), adjusted for inflation beginning in 2027.

Additionally, the newly reinstated bonus depreciation and immediate expensing of domestic research and experimental expenditures (see The One Big Beautiful Bill Act Signed into Law: Tax Implications at a Glance for more information) may allow certain corporations to further reduce their “aggregate gross assets,” expanding the number of businesses that may qualify as a qualified small business with the new $75 million threshold.

Effective Date

The expanded QSBS tax benefits under the OBBBA apply to QSBS issued or acquired after July 4, 2025 and to taxable years beginning after July 4, 2025.

There are three important considerations with respect to the acquisition date or issuance date of QSBS:

• The newly revised Section 1202(a) requires taxpayers to take into account any carryover holding periods in determining the acquisition date of their QSBS. This means that, generally, taxpayers will not be allowed to reset their acquisition date by exchanging QSBS acquired prior to July 5, 2025 for new QSBS subject to the new, more favorable rules in a stock-for-stock exchange or certain other QSBS transfers (including under Section 1045).
• Any QSBS acquired prior to July 5, 2025 will still be subject to the pre-OBBBA $10 million per-issuer cap even if such QSBS is sold after the July 5, 2025 effective date.
• A corporation that has previously reached the $50 million gross asset threshold may issue new QSBS beginning July 5, 2025 until such corporation reaches the new $75 million threshold.

Accordingly, a taxpayer may have acquired QSBS subject to the pre-OBBBA rules and QSBS subject to these new rules from the same issuing corporation, making diligent recordkeeping by both the taxpayer and the corporation vital to utilizing the expanded QSBS tax benefits.

Implications

The expansion to the QSBS tax benefits creates new opportunities within the emerging company ecosystem. Founders and investors will have increased flexibility to take advantage of exit opportunities and startups will have additional time to issue QSBS before the higher $75 million gross asset threshold is reached.

Please reach out to Tim Santoli, Gregg Benson, Liz Allison, or your Mintz relationship attorney with any questions about QSBS under the OBBBA or how to successfully take advantage of these new tax benefits.

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