The recently enacted One Big Beautiful Bill Act (the “OBBB”) modifies the already taxpayer-friendly Qualified Small Business Stock (“QSBS”) rules under Code §1202.
Under prior law, the QSBS rules provided certain taxpayers with an exclusion from capital gains tax on a disposition of C corporation stock. The OBBB has loosened the eligibility requirements for QSBS stock acquired after July 4, 2025, increasing the availability of the popular tax benefit.
Prior Rules:
Code § 1202 allows an individual or trust to exclude from its taxable income capital gains attributable to the disposition of QSBS held for longer than five years. QSBS is defined as capital stock of a C corporation. The C corporation cannot have aggregate gross assets in excess of $50 million between August 10, 1993 and the date of issuance. The QSBS must be original issue. Certain types of businesses are disqualified from QSBS rules, including companies engaged in providing professional services.
The amount of the gain that may be excluded is capped depending on the date of issue ranging from 50% to 100%. Additionally, each taxpayer has a lifetime exclusion of $10 million of eligible gain or an annual limitation of 10 times the taxpayer’s basis in the QSBS capped at $10 million. The exclusion is per taxpayer, per issuer.
Changes Under the Act:
All changes affect stock issued after July 4, 2025. For stock issued on or before July 4, 2025, the prior rules outlined above remain.
Holding Period: The Act reduces the holding period from five years to three years.
Gross Asset Value Limitation: The Act increases the $50 million gross asset limitation to $75 million. This means that the aggregate gross assets of the corporation at all times before the issuance of stock and immediately after the issuance of stock may not exceed $75 million. This $75 million limit will also adjust for inflation beginning in tax year 2027.
Exclusion Percentages: The Act allows a tiered exclusion as follows:
50% exclusion for stock held for three years
75% exclusion for stock held for four years
100% exclusion for stock held for five years
Lifetime Limitation per Taxpayer: The Act increases the $10 million limitation (per taxpayer, per issuer) to $15 million (per taxpayer, per issuer). However, the Act does not affect the alternative option of 10 times the taxpayer’s tax basis in the QSBS.
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The OBBB modifications broaden the availability of the QSBS tax benefit to more taxpayers. Qualifying taxpayers should take advantage of the favorable tax treatment of QSBS. The tax and business attorneys at McLaughlinQuinn LLC regularly counsel startups and investors on tax planning to maximize tax benefits. For more information on this newsletter, contact the business and tax attorneys Jeffrey B. Cianciolo, Esq., Partner or Victoria L. Veatch, Esq., LL.M., Attorney.