How the One Big Beautiful Bill Act changes QSBS rules
On July 4, President Trump signed the One Big Beautiful Bill Act (OBBB) into law, introducing drastic changes to tax policy. These include amending the rules under Section 1202 for qualified small business stock (QSBS).
QSBS represents one of the most valuable tax planning strategies for business owners and sellers. That value is typically realized by taxpayers through the exclusion of gain on the sale of QSBS from taxable income, potentially resulting in zero tax on the sale of a business.
If you own or invest in qualified small businesses, the new law may offer you additional financial incentives. Keep reading to learn what you need to know about how the OBBB affects QSBS.
What were QSBS rules prior to the OBBB?
Pre-OBBB rules apply to stock issued on or before July 4, 2025. Under these rules, the QSBS gain exclusion amount was a minimum of $10 million per shareholder or 10 times their investment amount, subject to asset basis rules for noncash contributions and the exclusion percentage limitations based on date of stock issuance.
To qualify, the company and its shareholders must meet certain criteria in accordance with Section 1202, including:
- Domestic C corporation: The company must be a domestic C corporation on the date of original stock issuance to a noncorporate shareholder.
- Active business requirement: At least 80% (by value) of the assets of the corporation must be used by the corporation in the active conduct of one or more “qualified trades or businesses.”
- Holding period: The stock must be held for at least five years (cliff-vesting of QSBS benefit after five years).
- Aggregate gross assets: At all times from August 9, 1993, through the date of (and immediately following) stock issuance, the aggregate gross assets of the corporation (or any predecessor) must not have exceeded $50 million.
How has the OBBB changed QSBS requirements?
As part of a sweeping rewrite of the tax code, the OBBB made several taxpayer-friendly changes to the QSBS rules for stock issued after July 4, 2025. While the domestic C corporation and active business requirements remain, new rules include:
1. Minimum gain exclusion
The $10 million per shareholder minimum gain exclusion amount is increased to $15 million per shareholder and adjusted for inflation beginning after 2026.
2. Holding period
QSBS benefit is no longer subject to a cliff-vesting five-year holding period. Rather, QSBS gain exclusion is phased in starting with a three-year holding period. That phase-in works as follows:
- Three-year holding period results in 50% gain exclusion;
- Four-year holding period results in 75% gain exclusion; and
- Five-year holding period results in 100% gain exclusion.
3. Aggregate gross assets
For stock issued after July 4, 2025, the $50 million aggregate gross assets threshold is increased to $75 million and adjusted for inflation beginning after 2026.
What do the new QSBS rules mean for business owners and investors?
Let’s say that an individual decides to start a new business, or in some cases, contribute an existing business operation (in a partnership, disregarded LLC , or sole proprietorship) to a newly formed domestic C corporation after July 4, 2025. That corporate formation or contribution event, potentially in conjunction with the raising of additional capital, results in the issuance of stock intended to be QSBS.
At inception (including the effect of any external capital contributions), the company’s aggregate gross assets for Section 1202 purposes are below the $75 million threshold set forth by the OBBB and at least 80% of the company’s assets are actively used in a qualified trade or business.
- Assuming the company and its shareholders continue to satisfy all relevant requirements under Section 1202 (e.g., original stock issuance requirement, no disqualifying redemptions, active business requirement and qualified small business requirement), the shareholders would be eligible to exclude 50% of gain in the event of a stock sale after a three year holding period, 75% of the gain after a four year holding period, and 100% of the gain after a five year holding period. This is (subject to the $15 million or 10 times investment gain limitation).
- Under Section 1202, any gain not excluded under the 50% and 75% holding period scenarios would be subject to a 28% tax rate (rather than the 20% top tax rate for long-term capital gains) plus 3.8% net investment income tax.
- If each shareholder has sufficient limitation to exclude all their gain in the event of a stock sale, the 50%, 75%, and 100% gain exclusion scenarios would result in an effective federal income tax rate on the total pre-exclusion gain of 15.9%, 7.95% and 0%, respectively.
- In the event a previously existing business operation is contributed to a corporation in conjunction with the issuance of QSBS, the math in the previous example would apply only to gain on appreciation from after the QSBS is issued.
How Wipfli can help
Tax law recently changed in a major way. This means the business landscape is now shifting as well. If you own or invest in qualified small businesses, work with us to determine if you can benefit from gain exclusion under Section 1202, and other new tax rules. Start a conversation.
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