OBBBA Expands Qualified Small Business Stock Tax Benefits by Richard E. Cabrera, JD, LLM, CPA
Posted on December 22, 2025
by
Richard Cabrera
One of the many investor-friendly provisions of the One Big Beautiful Bill Act (OBBBA) is the expansion of Internal Revenue Code Section 1202, which enables owners and early investors in domestic C corporations to permanently exclude capital gains from the sale or exchange of qualified small business stock (QSBS). The changes contained in the new law increase the number of companies qualifying to issue QSBS, reduce the holding period required to benefit from the provision, and expand the tax savings available to shareholders.
What is Qualified Small Business Stock?
Congress introduced QSBS in 1993 to incentivize investment in small businesses and allow early-stage investors to exclude from their taxable income capital gains on the sale of those shares after a specific period of time. To qualify for this benefit, investors must acquire the stock directly from a “qualifying small business” structured as a domestic C corporation in exchange for cash or services, and they must have held the QSBS for at least five years before selling it. Despite the use of the term “small business,” the actual size of the qualifying company can be quite significant.
For example, before the enactment of the OBBBA, the issuing company was required to have aggregate gross assets of $50 million or less at the time of issuance of the shares and use 80 percent of its assets in the active conduct of a trade or business for the duration the investor held the stock. Specifically excluded were small business entities in the banking, hospitality, farming, and professional services industries, such as accounting, architecture, engineering, hospitality, and financial and brokerage services, whose employees’ skills and expertise are the companies’ primary assets.
Larger Corporations Qualify Under New Law
Though Congress made some modifications to the QSBS provisions over the three decades, those included in the OBBBA are the most favorable yet.
Effective July 4, 2025, the definition of QSBS refers to originally issued shares in eligible domestic C corporations with assets of up to $75 million (previously $50 million) on the date of and immediately after it issues stock to investors in exchange for cash, property or compensation for performance of services. This higher asset value threshold is indexed for inflation, effectively expanding the breadth of companies that qualify to issue QSBS in the future. This may include stock of previously structured LLCs and partnerships that convert to C corporations. However, the law continues to exclude businesses in specific industries, non-C corporations, and entities that do not meet the asset-based testing requirement.
Higher Tax Savings for Investors
The law also makes QSBS more appealing for investment by increasing the baseline of capital gains that business founders and investors may exclude from taxation to $15 million, up from the previous $10 million. For tax years after December 31, 2026, this cap is also indexed to increase in line with inflation, allowing investors to shield a greater portion of their future capital gains from federal taxes.
Shorter Investment Holding Periods
While the law applies the full $15 million gain exclusion to QSBS held for at least five years, it also introduces shorter holding periods that may qualify investors for reduced tax benefits over a shorter period. For example, dispositions of stock held for four years qualify a taxpayer to exclude 75 percent of the resulting gain from taxes, or 50 percent for stock held for at least three years.
While IRS guidance is needed to sort through all the nuances of the changes to QSBS, it is clear that the BBBA provides qualifying businesses with enhanced tools to attract start-up capital while delivering oversized after-tax returns to early investors, including employees and private equity firms. Planning under the guidance of experienced advisors and CPAs is critical to maximize the law’s potential benefits.
About the Author: Richard E. Cabrera, JD, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax planning, consulting, and mergers and acquisition services to businesses and their owners located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.
← Previous
