OBBBA Enhances Tax Breaks for Qualified Small Business Stock
- Viktoriya Barsukova, EA, MBA
- Sep 8
- 6 min read
The One Big Beautiful Bill Act (OBBBA) gives tax-favored qualified small business stock (QSBS) its biggest upgrade in more than a decade.
The changes should help start-ups and other companies raise capital, and should enable business founders, investors, and employees who receive stock to reduce or even eliminate the federal tax when they sell their holdings.
They also make the C corporation structure more attractive than ever for businesses that qualify to issue QSBS.
What Is QSBS?
QSBS is stock issued anytime after August 10, 1993, by a domestic C corporation at least 80 percent of whose assets are used in the active conduct of a qualified business. (Many businesses don’t qualify—see below.)
For QSBS issued through July 4, 2025, the corporation’s gross assets (money and other property) must have been less than $50 million at all times prior to, and immediately after, the stock was issued (including amounts received in the stock issuance).
The corporation’s assets can grow to more than $50 million without impacting the status of QSBS already issued.
Non-corporate taxpayers, including individuals, pass-through entities, and trusts, may acquire QSBS directly from the corporation by cash purchase, in exchange for property (other than stock) or as compensation for services rendered to the corporation. QSBS may also be acquired in a tax-free transaction such as by gift or inheritance from a QSBS owner, or as a partnership distribution.
You can’t purchase QSBS in the secondary market or from another QSBS owner and benefit from the exclusion.
For QSBS purchased through July 4, 2025, if you hold the stock for at least five years, you may exclude from federal tax anywhere from 50 percent to 100 percent of the capital gains tax and any net investment income tax (NIIT) on the excluded gain. The excluded gain depends on when the QSBS was acquired:
100 percent exclusion for stock acquired after September 27, 2010, and before July 5, 2025
75 percent for stock acquired February 18, 2009, through September 27, 2010
50 percent for stock acquired after August 10, 1993, and before February 18, 2009
In addition, there is a cap on the exclusion for each shareholder, equal to the greater of:
$10 million, or
10 times the shareholder’s basis in the stock.
Example. In 2019, Bill invests $50,000 for stock in ABC Corp., a high-tech start-up (C corporation) with gross assets of $25 million. In 2025, he sells his stock for $500,000. His stock is QSBS that he held for over five years, so his entire $450,000 profit ($500,000 − $50,000) is free of federal capital gains tax and the NIIT.
OBBBA Enhancements for QSBS Exclusion
OBBBA Enhances Tax Breaks for Qualified Small Business Stock
The OBBBA enhances the tax exclusion for QSBS in three ways. These enhancements apply only to QSBS issued after July 4, 2025. QSBS issued before July 5, 2025, remains subject to the pre-OBBBA rules even if it is sold after July 4, 2025.
QSBS owners can’t exchange shares acquired before July 5, 2025, for shares issued after this date to benefit from these enhancements. Moreover, QSBS issued after July 4, 2025, using proceeds from the sale of QSBS issued prior to July 5, 2025, will be governed by the pre-OBBBA rules.
Enhancement 1: Increased Exclusion Limit
The OBBBA raises the exclusion cap by 50 percent, from $10 million to $15 million per shareholder. The $15 million limit will be adjusted for inflation starting in 2027.
The alternative exclusion limit—10 times the investor’s initial basis in the QSBS—remains unchanged. So you are now looking at an exclusion equal to the greater of $15 million, or 10 times your basis in the QSBS.
Enhancement 2: Shorter Holding Periods for Partial Tax Exclusions
OBBBA Enhances Tax Breaks for Qualified Small Business Stock
In the start-up world, one year can seem like a decade. Thus, the five-year holding period discouraged some investors.
The OBBBA helps those who want to cash out sooner than five years, by providing partial tax exclusions in return for holding periods as short as three years. There are now three tiers of holding periods and exclusions:
Holding Period | Gains Excluded | Effective Tax Rate |
3 years | 50 percent | 15.9 percent |
4 years | 75 percent | 7.95 percent |
5 years+ | 100 percent | 0 |
When the gain from the sale of QSBS is only partially excluded, the top 28 percent capital gains rate applies to the portion of the gain within the exclusion limit. The 3.8 percent NIIT will also be due for most QSBS owners on the gain that is not excluded.
Example. Arthur acquires QSBS in a start-up corporation on August 1, 2025, for $1 million and sells it three years later, on August 1, 2028, for $21 million. He may exclude $7.5 million of gain (50 percent of the $15 million QSBS limit).
He must pay a 28 percent capital gains tax and the NIIT on the next $7.5 million (the remainder of the gain within the $15 million exclusion limit). He must pay a 20 percent capital gains tax and the NIIT on the remaining $5 million.
QSBS owners now have much more flexibility in deciding when to sell QSBS. If a good opportunity to sell arises after only three or four years, they can take advantage of it and still enjoy meaningful tax relief.
In addition, non-corporate QSBS owners who sell after three or four years have the option of reinvesting the taxable portion of their QSBS gain into new QSBS. If they do so within 60 days of the sale of their old QSBS, they won’t recognize any gain. The OBBBA did not change this rollover provision.
Enhancement 3: Larger Companies Can Issue QSBS
The OBBBA expands the universe of corporations that can issue QSBS, by increasing the gross asset threshold (the total money and property owned by the corporation) from $50 million to $75 million and, for the first time, indexing it for inflation.
(Had the threshold been indexed for inflation since it was established in 1993, it would be $111 million today.)
The $75 million gross assets threshold applies to all times prior to, and immediately after, QSBS is issued. This means that if a corporation’s gross assets exceeded $50 million before July 5, 2025, but never exceeded $75 million, it may issue QSBS after July 4, 2025.
The OBBBA promotes use of QSBS in another way: by instituting 100 percent bonus depreciation and immediate expensing of domestic research and experimental expenditures. These accelerated deductions will permit more corporate issuers to remain under the gross asset cap the year they issue QSBS, even if they raise more than $75 million in capital.
All these OBBBA changes will permit larger companies and later-stage startups to qualify as “small businesses” and issue QSBS.
Businesses That Don’t Qualify for QSBS Treatment
QSBS is primarily for corporations that make or sell things, not those that provide services.
Corporations qualified to issue QSBS include those in the high-tech, manufacturing, wholesale or retail trade, and transportation sectors.
Corporations engaged in activities in any of the following fields are not qualified to issue QSBS:
Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, finance, or brokerage services
Banking, insurance, financing, leasing, investing, or similar business
Farming
Mining and other resource extraction
Hotel, motel, restaurant, or similar hospitality services
Also not qualified to issue QSBS: any trade or business whose principal asset is the reputation or skill of one or more of its employees.
Not All States Recognize QSBS
Not all states conform to the federal QSBS exclusion.
Gain from the sale of QSBS is fully taxable in the following states:
Alabama
California
Mississippi
New Jersey (but it will allow the exclusion for 2026 and later)
Pennsylvania
Hawaii provides a 50 percent exclusion. Some states that provide for a full QSBS exclusion may delay implementing the OBBBA enhancements.
How to Earn $15 Million Tax-Free
It’s now possible to earn up to $15 million tax-free without investing much money. Start a qualified business as a C corporation. Build the value of the business to $15 million through your hard work.
Once at least five years have passed, sell the business (all your stock) for $15 million. The entire proceeds will be free of federal income tax.
Takeaways
The OBBBA significantly strengthens the benefits of QSBS, making it an even more powerful tool for entrepreneurs, investors, and employees.
By raising the exclusion cap to $15 million (with inflation indexing), introducing shorter holding periods for partial exclusions, and allowing larger companies—those with up to $75 million in assets—to issue QSBS, the law expands access to tax-free or tax-reduced gains.
These changes create new flexibility for investors who may want to sell earlier, give later-stage startups more opportunities to raise capital under QSBS, and make the C corporation structure more appealing for founders.
While not every business or state recognizes the benefits, for those who qualify, the OBBBA marks the most meaningful upgrade to QSBS in over a decade and opens the door to substantial tax savings for growing businesses and their stakeholders.
Updated: On September 4, 2025, Bradford changed the example from $750 million to $15 million.
IRC Section 1202(d).
IRC Sections 1202(c)(1)(B); 1202(h).
IRC Sections 1202(a)(1); 1202(a)(3); 1202(a)(4).
IRC Section 1202(b)(1).
One Big Beautiful Bill Act (P.L. 119-21), Section 70431, adding IRC Sections 1202(a)(6)(B); IRC Section 1223.
One Big Beautiful Bill Act (P.L. 119-21), Section 70431, adding IRC Section 1202(b)(4).
IRC Sections 1(h)(4)(A)(ii); 1(h)(7).
IRC Section 1045.
One Big Beautiful Bill Act (P.L. 119-21), Section 70431, amending IRC Section 1202(d)(1), adding IRC Section 1202(b)(4).
IRC Section 1202(e)(3).
By: W. Murray Bradford, CPA
Publisher
Tax Reduction Letter
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