On July 4, 2025, President Donald Trump signed what he calls the One Big Beautiful Bill Act (OBBBA) into law, which brought some important transformative updates to the U.S. Internal Revenue Code. A provision that stands out is the expansion of the Qualified Small Business Stock rules, which is offering significant tax exemptions for investors and founders of small C corporations. Building on the Small Business Investment Act of 2025, these transformations make QSBS a more impactful tool in startups and emerging companies. In today’s segment we will dive into the Qualified Small Business Stock program, detailing its preexisting framework, the OBBBA’s key enhancements, tax implications, and practical takeaways for taxpayers. Whether you’re an entrepreneur or an investor, here’s how the QSBS expansion can unlock substantial tax savings.

Understanding Qualified Small Business Stock

The Qualified Small Business Stock rules, which is briefly stated in Internal Revenue Code Section 1202, allow noncorporate taxpayers such as individuals or trusts to remove capital gains from selling stock in qualifying C corporations, provided specific criteria are met. Enacted in 1993, QSBS has long incentivized investment in small businesses, with exclusion rates increasing over time from 50% to 100% for stock acquired after 2010. The OBBBA, effective July 4, 2025, enhances these benefits, making QSBS more accessible and lucrative to the business owner. Below, we explore the original rules, new changes, and their impact on investors and founders.

Why QSBS Matters

The Qualified Small Business Stock program is an important pillar of tax policy aimed at fostering innovation:

• Tax Savings: Taxpayers who are eligible can avoid paying up to 100% of capital gains, which can possibly save millions in federal taxes.
• Economic Growth: QSBS suggest investing in early-stage companies, which can create more job opportunities and boost entrepreneurship.
• Investor Flexibility: The OBBBA’s updates make QSBS more appealing to private equity, independent sponsors, and other investors seeking quicker liquidity.

With the OBBBA’s changes, the Qualified Small Business Stock program will improve investments in sectors like technology, manufacturing, and retail, driving economic growth.

Preexisting QSBS Framework

Before the OBBBA, the Qualified Small Business Stock rules provided tax benefits under the following conditions:

• Eligibility: QSBS applies to stock in domestic C corporations with aggregate gross assets not exceeding $50 million at any time after August 10, 1993, through the stock issuance date, calculated using tax basis.
• Acquisition: Stock must be acquired at original issuance in exchange for nonstock property (e.g., cash) or as compensation for services.
• Holding Period: A minimum five-year holding period is required to qualify for capital gains exclusion.
• Exclusion Caps: Taxpayers can exclude gains up to the greater of:
  • $10 million per issuer (cumulative across all dispositions of that issuer’s stock).
  • 10 times the taxpayer’s adjusted basis in the disposed QSBS.
• Exclusion Rates: Depending on acquisition date:
  • 50% exclusion for stock acquired after August 10, 1993, but before February 18, 2009.
  • 75% exclusion for stock acquired after February 17, 2009, but before September 28, 2010.
  • 100% exclusion for stock acquired after September 27, 2010.
• Exclusions: Businesses in professional services (e.g., health, law, accounting, banking) or industries like farming, hospitality, or mineral extraction are ineligible to issue QSBS.

These rules made QSBS valuable but restrictive due to the five-year holding period and $50 million asset cap.

OBBBA’s Key QSBS Enhancements

The OBBBA introduces three significant updates to the Qualified Small Business Stock rules, effective for stock acquired after July 4, 2025:

1. Shortened Holding Period:
   • The minimum holding period is reduced from five years to three years.
   • A phased-in exclusion applies:
     • 3–4 Years: 50% of capital gains excluded (up to the cap).
     • 4–5 Years: 75% of capital gains excluded (up to the cap).
     • 5+ Years: 100% of capital gains excluded (up to the cap).
   • This change enables earlier exits, appealing to investors seeking faster liquidity.
2. Increased Gross Asset Limit:
   • The maximum aggregate gross asset value for qualifying C corporations rises from $50 million to $75 million.
   • This limit is now indexed for inflation annually, expanding the range of eligible companies.
3. Higher Per-Issuer Cap:
   • The flat cap on excludable capital gains per issuer increases from $10 million to $15 million.
   • This cap is also indexed for inflation, enhancing tax savings for smaller investors.

These updates apply only to stock acquired after July 4, 2025, with tacked holding periods under Code Section 1223 considered. Preexisting QSBS remains subject to the original five-year holding period and caps.

Illustrative Example

Consider an investor who acquires Qualified Small Business Stock on January 1, 2026, for $1 million and sells it on January 1, 2029, for $20 million, realizing a $19 million gain:

• Exclusion: 50% of the gain up to the $15 million cap, or $7.5 million, is excluded.
• Taxable Gain: The remaining $7.5 million within the cap is taxed at 28% ($2.1 million), and the $4 million excess is taxed at 20% ($0.8 million).
• Total Tax: $2.9 million, compared to $3.8 million without QSBS (20% on $19 million).
• Savings: $0.9 million, with greater savings if held for five years.

This example underscores the tax advantages of the new rules.

Unchanged Aspects of QSBS

Several Qualified Small Business Stock provisions remain unchanged under the OBBBA:

• Ineligible Businesses: Professional services (e.g., health, law, banking) and certain industries (e.g., farming, hospitality) remain excluded from issuing QSBS.
• Reorganization Rules: QSBS status is preserved in qualifying reorganizations, unchanged by OBBBA.
• Pass-Through Entities: Gains through partnerships or S corporations still qualify, subject to existing rules.
• Regulatory Gaps: The IRS has not issued comprehensive guidance on business activities, reorganizations, or pass-through entities.

These unchanged elements highlight the importance of careful tax planning to ensure eligibility.

Tax Rates and Implications

The OBBBA’s tiered exclusion rates reintroduce the 28% capital gains tax rate for non-excluded gains within the QSBS cap:

• Excluded Gain: Tax-free up to the cap (50%, 75%, or 100%, based on holding period).
• Non-Excluded Gain Within Cap: Taxed at 28%.
• Excess Gain: Taxed at the standard 20% capital gains rate.

For a $20 million gain on QSBS held for three years:

• $7.5 million excluded (50% of $15 million cap).
• $7.5 million taxed at 28% ($2.1 million).
• $5 million taxed at 20% ($1 million).
• Total tax: $3.1 million.

This structure incentivizes longer holding periods for maximum tax benefits.

Opportunities for Stakeholders

The Qualified Small Business Stock expansion offers significant opportunities:

• Faster Exits: The three-year holding period allows investors to realize tax benefits sooner, attracting private equity and opportunistic investors.
• Broader Eligibility: The $75 million asset cap (with inflation adjustments) includes more scaling companies, such as tech startups.
• Increased Savings: The $15 million cap (also inflation-adjusted) benefits smaller investors, while the 10x basis cap remains lucrative for larger investments.
• Strategic Planning: Founders can optimize entity choice, equity compensation, and exit strategies to maximize QSBS benefits, drawing more capital.

Challenges and Considerations

The Qualified Small Business Stock program has challenges:

• Complexity: Navigating eligibility and holding periods requires expert tax planning.
• Regulatory Uncertainty: Limited IRS guidance on business activities and reorganizations poses risks.
• Broader OBBBA Impact: The OBBBA’s $1 trillion Medicaid cuts could affect healthcare startups, potentially limiting QSBS-eligible companies in that sector.

To succeed, taxpayers should:

• Plan Early: Structure C corporations and stock issuances for QSBS eligibility.
• Monitor Adjustments: Track inflation-driven increases in asset and gain caps.
• Seek Expertise: Consult tax professionals to ensure compliance and optimize benefits.

Case Study: QSBS in Practice

Imagine InnovateTech, a C corporation developing renewable energy solutions. In 2026, it issued Qualified Small Business Stock to an investor for $2 million, with gross assets at $70 million. In 2029, the investor sells for $25 million:

• Gain: $23 million.
• Exclusion: 50% of $15 million ($7.5 million) excluded.
• Taxable Gain: $7.5 million at 28% ($2.1 million) + $8 million at 20% ($1.6 million) = $3.7 million.
• Savings: $0.9 million compared to $4.6 million at 20% without QSBS.

If held until 2031 (five years), the full $15 million cap could be excluded, amplifying savings.

How to Take Action

To leverage the Qualified Small Business Stock expansion:

1. Assess Eligibility: Verify your company or investment meets QSBS criteria.
2. Optimize Issuances: Structure stock sales to qualify for exclusions.
3. Plan Exits: Align sales with the three-, four-, or five-year thresholds.
4. Consult Experts: Engage tax advisors, such as Holland & Knight’s Tax Practice, for tailored strategies.

Conclusion

The Qualified Small Business Stock expansion under the OBBBA, effective July 4, 2025, is a transformative opportunity for investors and entrepreneurs. With a reduced holding period, higher asset and gain caps, and inflation adjustments, QSBS offers unmatched tax savings, fueling investment in America’s small businesses. Strategic planning is key to unlocking these benefits and driving innovation.

Call to Action

Seize the Qualified Small Business Stock opportunity! Review your investments, consult a tax advisor, and explore how the OBBBA’s changes can enhance your financial strategy.