Expansion of QSBS Benefits Under the One Big Beautiful Bill 

July 9, 2025

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, which had narrowly passed through the United States Congress. The OBBBA makes permanent certain tax provisions that were due to expire from the Tax Cuts and Jobs Act which was enacted in 2017 and includes certain other changes to federal and estate tax law, including, among other things, changes affecting businesses, individuals and certain aspects of U.S. international taxation.

This client alert focuses on the changes made to qualified small business stock (QSBS) under Section 1202 of the Internal Revenue Code of 1986, as amended, issued after the effective date of the OBBBA, July 4, 2025 (the Effective Date). Importantly, the changes to the Section 1202 rules only apply to QSBS issued after the Effective Date, and the old Section 1202 rules still apply for QSBS issued on or prior to the Effective Date.

Pre-Effective Date Summary of QSBS

In general, for QSBS issued on or prior to the Effective Date, Section 1202 allows an individual or other non-corporate taxpayer to exclude from income up to 100% of the amount of eligible gain recognized on the sale or exchange of QSBS held for more than five years. The exclusion is subject to an annual limitation equal to the greater of either:

  1. $10 million (reduced by eligible gain taken into account by the taxpayer in prior years with respect to the disposition of QSBS of the corporation) or
  2. 10 times the aggregate adjusted tax basis of the QSBS disposed of by the taxpayer during the taxable year.

In addition, to qualify for the exclusion, a number of shareholder and corporate-level requirements must be met, including:

  1. the stock must be acquired directly from a domestic C corporation at the time of its original issuance,
  2. the corporation had aggregate assets of not more than $50 million at all times before and immediately after the stock issuance,
  3. the taxpayer held the stock for more than five years,
  4. the issuing corporation was engaged in a qualified trade or business, which generally excludes certain service based fields, financial services and certain other fields, and
  5. the corporation satisfies an active business requirement during substantially all of the taxpayer’s holding period.

The above summary is not a complete discussion of all the QSBS requirements.

The OBBBA contains three significant changes that expand the exclusion for QSBS issued after the Effective Date in an attempt to incentivize investment in U.S. C corporations:

1. Tiered Gain Exclusion & Holding Period

The OBBBA shortens the holding period required to obtain a partial gain exclusion on the sale of QSBS in an effort to loosen the restrictions on QSBS and incentivize shorter-term investment. Under the OBBBA, the five-year holding requirement was replaced with a tiered phase-in approach for QSBS issued after the Effective Date. Under the tiered approach, an individual or other non-corporate taxpayer may now exclude:

  1. up to 50% of gain if the QSBS is held for at least three but less than four years,
  2. up to 75% of gain if the QSBS is held for at least four but less than five years, and
  3. up to 100% of gain if the QSBS is held for five or more years.

QSBS gain that would otherwise be excluded under Section 1202, but for the application of the tiered gain exclusion rules under Section 1202 is taxed at the maximum capital gains rate of 28%, resulting in an the effective federal income tax rate of 15.9% (including the 3.8% net investment income tax) for QSBS held for at least three but less than four years, and 7.95% (including the 3.8% net investment income tax) for QSBS held at least four but less than five years.

2. Increased Exclusion Cap

As noted above, for QSBS issued on or prior to the Effective Date, the amount of gain eligible for exclusion was subject to an annual limitation equal to the greater of either:

  1. $10 million (reduced by eligible gain taken into account by the taxpayer in prior years with respect to the disposition of QSBS of the corporation) or
  2. 10 times the aggregate adjusted tax basis of the QSBS disposed of by the taxpayer during the taxable year.

Under the OBBBA, the per-issuer gain exclusion was raised from $10 million to $15 million and is set to be adjusted for inflation beginning in 2027. No changes were made to the 10 times the adjusted tax basis portion of the calculation.

3. Increased Gross Asset Cap

The OBBBA increases the gross asset threshold from $50 million to $75 million for QSBS and is subject to subsequent adjustments for inflation beginning in 2027. The new $75 million cap applies to QSBS issued after the Effective Date and includes QSBS issued as a result of partnership conversions. Accordingly, existing partnerships with gross assets between $50-$75 million, which previously would have been disallowed from achieving QSBS status, may now consider converting to a C Corporation to avail themselves of the benefits of QSBS.

The above changes have the potential to significantly increase the number of taxpayers eligible to exclude a portion of their gain under Section 1202, including founders and investors in early-stage companies. Under the OBBBA, investors looking to make an earlier exit in a company will be eligible for partial gain exclusion after a three-year holding period, and the increase in the gross asset threshold will add more flexibility for qualification as a qualified small business for investors in early capital funding rounds. In addition, the increased per-issuer exclusion cap may add planning opportunities for taxpayers owning QSBS issued before and after the Effective Date that are disposing of a portion of their QSBS over a period of years. Selling the pre-Effective Date QSBS first may permit the taxpayer to claim up to $10 million of gain exclusion on the pre-Effective Date QSBS and potentially then claim an additional $5 million of gain exclusion on the subsequent sale of post-Effective Date QSBS.

The expansion of QSBS benefits under the OBBBA is a factor to consider in determining the most advantageous choice of entity and tax classification. Founders and early-stage companies should consider whether C corporation status is the right fit for their business structure.

To discuss any questions you have regarding the changes to the QSBS rules or any other tax aspects of the OBBBA, please contact any of the following lawyers: James Forsyth, Christopher McLoon, Nathan Rudy, Richard Silpe, or Joshua Weinberger.

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Authors

Nathan L. Rudy

Associate

nrudy@cozen.com

(215) 366-4450

Richard J. Silpe

Chair, Tax

rsilpe@cozen.com

(215) 665-2704

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