3 new changes to qualified small business stock that can supercharge tax savings
Managing Director, Wealth Planning and Advice
- The One Big Beautiful Bill Act (OBBBA) introduced several changes to qualified small business stock (QSBS), which refers to stock in a U.S. C corporation that meets certain rules under Internal Revenue Code Section 1202.
- The changes include increasing the potential exclusion benefit and expanding the asset threshold, so more companies might qualify.
- For individuals who own QSBS, the primary benefit is the potential to reduce capital gains taxes when shares in a qualified small business are later sold.
- Early planning with personal tax and legal advisors and thorough documentation can help investors navigate potential QSBS complications and preserve beneficial tax treatment.
Holders of QSBS may be eligible for tax benefits that can significantly reduce the federal capital gains tax owed when they sell shares of a qualified small business.
The OBBBA, signed into law on July 4, 2025, further enhanced those benefits by increasing the potential QSBS exclusion per taxpayer and expanding the gross asset threshold, allowing more companies to qualify for the tax treatment. The law also makes it easier for more people and companies to potentially use QSBS by raising some of the key dollar limits, which are set up to increase over time with inflation.
Even with these changes, QSBS is complicated and highly dependent on an investor’s unique circumstances. Here’s what you need to know about the OBBBA changes to QSBS and how to navigate them.
What is QSBS?
QSBS refers to shares in a U.S. C corporation that meet certain rules under Section 1202 of the Internal Revenue Code. Key requirements of QSBS include the following:
- The shares were purchased directly from the company – not from another shareholder – when they were first issued.
- At least 80% of the issuing company’s assets must be used to actively operate a qualified business (not just holding investments or cash).
- The company must be below the applicable gross asset threshold when the stock is issued: $50 million for stock issued before the OBBBA and $75 million for stock issued after the OBBBA.
Companies offering professional services (e.g., accounting, banking, consulting, financial, health, insurance, leasing and legal) are typically excluded, as are businesses in the farming, hospitality, mining, and oil and gas industries.
Designed as a powerful tax incentive, QSBS is meant to encourage investment in small businesses, thereby supporting innovation and boosting entrepreneurial growth. Indeed, investors who buy QSBS and hold it for long enough may be subject to significantly less – or even zero – federal tax on a portion of their profits when they sell.
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How the QSBS tax break worked before the OBBBA
Prior to the OBBBA, if you held qualifying QSBS stock for at least five years, you may have been able to avoid federal tax on 50%, 75% or even 100% of your profit, depending on when you bought the stock and assuming all applicable rules were met.
There were limits, however, on how much of your profit could get the tax break. The maximum excludable gain was generally the larger of $10 million (per person, per company) or 10 times what you paid for the shares (technically, 10 times your adjusted basis).
For QSBS bought before September 27, 2010, 7% of the excludable gain is subject to Alternative Minimum Tax (AMT); that is, even though capital gains might be partially or fully excluded from taxes for QSBS purposes, an investor could still have to pay up to 28% in AMT on 7% of their capital gains.
Under both pre- and post-OBBBA rules, any QSBS profit that is not excludable will be subject to a 28% tax rate, plus an extra 3.8% net investment income tax (NIIT). This is instead of the usual 20% long-term capital gains rate.
3 key changes to QSBS introduced by the OBBBA
The OBBBA introduced three critical changes to QSBS that may make the tax treatment more accessible to certain taxpayers. Let’s walk through them:
- Tiered gain exclusion: For QSBS issued after July 4, 2025, the new law created a tiered system for capital gains exclusion based on how long you hold the shares, subject to certain limits and rules:
- QSBS held for three years: 50% of the profit may be excluded from federal tax.
- QSBS held for four years: 75% may be excluded.
- QSBS held for five years: 100% may be excluded.
- Higher exclusion amount: The standard cap on the maximum excludable gain increased from $10 million to $15 million (per taxpayer, per company). Starting in 2027, that $15 million cap will rise with inflation. You can still use the alternative limit of 10 times what you paid for the shares, however, if your adjusted basis is more than $15 million.
- More qualifying companies: To qualify as QSBS, the issuing company must be below the applicable gross asset threshold at the time the stock is issued. The OBBBA raised this cap from $50 million to $75 million, so more companies can potentially qualify. After 2026, the $75 million limit will also increase with inflation.
What to consider when planning for QSBS
You should consult with your tax advisor and attorney about structure, timing and recordkeeping to help support QSBS eligibility and improve after-tax proceeds. They can help you determine which strategy is right for your individual circumstances. The seven strategies below can help guide your conversation.
- Converting an LLC into a C corporation: QSBS generally must be stock in a C corporation acquired at original issuance. If your business operates as an LLC or S corporation, converting to a C corporation before a financing or equity issuance may help new shares meet QSBS requirements. Your QSBS holding period generally begins when you receive C corporation stock; time spent holding an LLC interest or S corporation stock usually doesn’t count.
- “Stacking” QSBS using multiple non-grantor trusts: In some situations, families may use multiple properly structured non-grantor trusts (each treated as a separate taxpayer) to potentially increase the total QSBS gain that can qualify for exclusion.
- Submitting paperwork that protects the tax benefit: QSBS is heavy on the details. Clean equity administration and documentation can make or break eligibility, especially if you ever need to prove it in an audit.
- Starting the holding period earlier: Some equity compensation or ownership strategies may allow employees or founders to start the QSBS holding period earlier, often by exercising stock options early into newly issued shares.
- Timing your exit under the OBBBA’s tiers: Under the OBBBA, holding QSBS longer can increase the percentage of excludable gain, and rollover rules may help in certain cases. Different exit timelines (three, four or five years; or the 60-day rollover window) could affect the share of excludable gain and net proceeds.
- Keeping IP and revenue in the issuing C corporation: QSBS eligibility depends in part on the issuing company actively operating a qualified business, so intellectual property (IP) ownership and revenue flow structure can also affect whether the stock qualifies.
- Coordinating and documenting as necessary: Planning for QSBS works best when corporate actions, equity grants, trust planning and exit strategies are coordinated up front. Make sure you have an integrated plan that links these factors to current QSBS rules.
If you want more detailed considerations on these topics to discuss with your advisor, JPMorganChase examines them in “Unlocking New Opportunities.”
The bottom line
The OBBBA increased both the potential tax savings and the planning complexity of QSBS under Internal Revenue Code Section 1202. For QSBS issued after July 4, 2025, higher thresholds and a tiered gain exclusion can improve after-tax proceeds. Working with your tax and legal advisors is imperative. Early, coordinated planning and disciplined documentation are also critical to preserving QSBS eligibility.
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