Qualified Small Business Stock: What the 2025 One Big Beautiful Bill Means for Start‑Ups and Investors

Disclaimer: This post is for informational purposes only and does not constitute legal or tax advice. Always consult a qualified advisor about your specific situation.

Background – What Is QSBS?

Qualified Small Business Stock (QSBS) refers to stock issued by a U.S. C‑corporation with gross assets not exceeding a statutory limit at the time of issuance. When certain requirements are met, Section 1202 of the Internal Revenue Code allows non‑corporate investors (individuals, trusts, and estates) to exclude some or all of the capital gain realized when they sell QSBS they have held for more than a specified holding period. Under the pre‑2025 rules, investors needed to hold QSBS for five years to exclude up to 100 % of the gain (subject to a per‑issuer cap), and the issuing company’s gross assets could not exceed $50 million.

On July 4, 2025, the One Big Beautiful Bill Act (OBBB) was signed into law. Among many tax changes, the OBBB expanded the QSBS regime in three major ways.

1 – Shorter Holding Periods

Before OBBB, investors had to hold QSBS for more than five years to exclude any gain. The new law introduces a tiered system for QSBS acquired after July 4 2025. Investors may now exclude:

• 50 % of the QSBS capital gain after a holding period of at least three years【674944966608017†L84-L96】;
• 75 % of the gain after at least four years;
• 100 % of the gain after five years, as before.

Gains subject to partial exclusions (50 % or 75 %) are taxed at a special 28 % federal rate plus the 3.8 % net investment income tax. QSBS issued on or before July 4 2025 still requires a five‑year holding period for any exclusion.

2 – Higher Per‑Issuer Cap

The law increases the amount of gain an investor can exclude per company. Previously, the per‑issuer gain exclusion cap was the greater of $10 million (per taxpayer, $5 million if married filing separately) or 10 times the investor’s basis in the QSBS. For QSBS acquired after July 4 2025, the cap increases to the greater of $15 million (adjusted for inflation after 2026) or 10 × basis. Inflation adjustments do not retroactively increase caps for gains realized in prior years. The 10 × basis alternative cap remains unchanged.

3 – Larger Companies Can Qualify

Under prior law, a corporation (and its subsidiaries) could issue QSBS only if its aggregate gross assets did not exceed $50 million immediately before and after the stock issuance. The OBBB raises this threshold to $75 million, indexed to inflation starting in 2027. This expansion means more growing companies can qualify as “small businesses” for QSBS purposes. Existing QSBS issued by companies with assets up to $50 million continue to follow the old rules.

Implications for Founders and Investors

Greater Flexibility

The introduction of three‑ and four‑year holding periods gives investors more flexibility. Entrepreneurs may plan earlier exits and still benefit from partial gain exclusions. Private‑equity sponsors and opportunistic investors can pursue liquidity events without waiting five full years.

Bigger Fund‑Raising Window

Raising the gross‑asset cap from $50 million to $75 million allows larger start‑ups to issue QSBS. Start‑ups approaching the old threshold might defer fundraising; the increased cap reduces this constraint. Because the cap is now indexed for inflation, it should continue to rise over time.

Continued Importance of Structure

To qualify for QSBS benefits, the issuing company must be a domestic C‑corporation engaged in an active business (excluding certain service industries like law, accounting, health and consulting). Investors must acquire the stock at original issuance for cash, property (other than stock) or services. These rules remain unchanged. Additionally, partial exclusions are subject to the 28 % capital‑gain rate on the taxable portion; thus, investors should work with tax advisors to model effective rates.

Effective Dates

The new rules apply to QSBS acquired after July 4 2025. Stock issued on or before that date remains subject to the old rules: a five‑year holding period and a $10 million gain cap. Investors must track the acquisition date of each tranche of QSBS to determine eligibility for the new exclusions.

Practical Tips for Start‑Ups and Investors

• Evaluate your entity type. If your company currently operates as an LLC, you may wish to convert to a C‑corporation before issuing new shares to take advantage of QSBS benefits. Consider the trade‑offs (double taxation, corporate formalities).
• Document issuance and basis. Keep detailed records of stock issuances, investor basis and dates of acquisition; partial exclusions and gain caps depend on these figures.
• Model exit scenarios. Work with advisors to determine the optimal holding period for your shares. Selling after three or four years may provide a balance between liquidity and tax savings.
• Monitor your asset levels. Growth and fundraising should be planned to keep aggregate gross assets within the $75 million threshold until shares are issued.
• Stay informed about future guidance. The IRS may issue regulations or guidance to fill gaps in the QSBS rules. Monitor developments to ensure compliance.

Conclusion

The One Big Beautiful Bill Act materially expands the benefits of Qualified Small Business Stock for both founders and investors. Shorter holding periods and higher caps make QSBS a more attractive planning tool, while the increased asset limit opens the door to more growing companies. Start‑up founders and investors should review their capital‑structure plans, document stock issuances carefully and consult with knowledgeable tax professionals to maximize these benefits. As always, this post is intended as a general overview; specific tax planning requires tailored advice.