Entrepreneurs are often looking for cash to pump up their company. It may come from outside investors or out of their own pockets. In either event, if the company issues “qualified small business stock” (QSBS) in exchange for the cash influx, the buyer can realize a big tax break down the road.
Now the new One Big Beautiful Bill Act (OBBBA) gives small business owners even more flexibility for injecting more capital into the operation.
[This is part of a Special Series on the tax changes made by the One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
Background: The tax break for QSBS under Section 1202 has gone through several iterations since it was introduced in 1993. Initially, the exclusion was limited to 50% of the gain from the sale of QSBS held at least five years, but the capital gain was taxed at 28%, for an effective tax rate of 14%.
Subsequently, the exclusion was raised to 75% and then to 100%. Finally, the Protecting Americans from Tax Hikes (PATH) Act of 2015 preserved the 100% exclusion and made it a permanent part of the tax code.
But the favorable tax treatment on the sale of QSBS isn’t automatic. To qualify for the 100% tax exclusion under existing law, the following requirements must be met:
- The stock must have been issued after August 10, 1993.
- The stock can’t be acquired in exchange for other stock.
- The issuing corporation must be a C corporation.
- A minimum of at least 80% of the corporation’s assets must be used in the active conduct of a qualified trade or business.
- The corporation can’t have more than $50 million in assets at the time the stock is issued.
- Certain businesses involving real estate or personal services (e.g., law, health, financial services, etc.) aren’t eligible for the exclusion.
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New law impact: Notably, the OBBBA expands the tax benefits for stock issued after July 4, 2025—the date of enactment—for stock that meets revised requirements. The new law contains three key changes of interest to entrepreneurs.
- An investor in QSBS, including the business owner, can qualify for a partial tax exclusion for holding the stock a shorter period of time The exclusion is 50% for stock held at least three years and 75% for four years. The holding period for the 100% exclusion remains five years.
- The new law allows business owners to issue more stock. Previously, the limit was the greater of $10 million or ten times the basis of the stock. The OBBBA boosts the dollar cap to $15 million.
- More companies can qualify for the QSBS tax break. The threshold to qualify as a “small business” is raised from $50 million to $75 million.
Note that there is a silver tax lining for any portion of gain that doesn’t qualify for any exclusion. If the stock has been held more than one year, any gain is taxed as long-term capital gain at a rate of 15% (20% for high-income Investors) under the regular rules.
Should your clients do it? Meet with them one-on-one to determine if issuing and acquiring Section 1202 stock is the right move for their family and their company, Take all the relevant factors—not just taxes—into account.
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Tags: Income Taxes, IRS, obbba, obbba tax credits, obbba tax law, obbba tax law changes, QSBS, Taxes
Dan Black November 13 2025 at 6:47 pm
Great article! I was curious if you periodically publish content on cost segregation for SMBS? Keep up the good work. Thanks.