On July 4, 2025, H.R. 1, known as the One Big Beautiful Bill Act (the “OBBB”) was signed into law. The OBBB makes comprehensive changes to federal law, including the Internal Revenue Code (the “Code”). Among the changes to the Code are enhancements to the qualified small business stock (“QSBS”) rules, which provide tax benefits to certain investors.
On July 4, 2025, H.R. 1, known as the One Big Beautiful Bill Act (the “OBBB”) was signed into law. The OBBB makes comprehensive changes to federal law, including the Internal Revenue Code (the “Code”). Among the changes to the Code are enhancements to the qualified small business stock (“QSBS”) rules, which provide tax benefits to certain investors.
Quick Takeaways: The QBBB:
• Relaxes the test for when stock issued or granted by a corporation would qualify as QSBS.
• Allows for earlier sales of QSBS without risking all of the benefits from investing in QSBS.
• Raises the amount of capital gains that may be excluded from taxation for certain investors in QSBS.
Existing QSBS Rules:
Before diving into the changes to the QSBS rules, it is important to understand the current regime. The Code generally allows a noncorporate taxpayer (e.g., an individual or trust) to exclude from taxable income capital gains attributable to the disposition of QSBS. The amount of capital gain that may be excluded is subject to a cap and depends on the original issuance date: (i) 50% of the gain for stock acquired before February 18, 2009; (ii) 75% of the gain for stock acquired between February 18, 2009, and September 27, 2010; and (iii) 100% for stock acquired after September 27, 2010; with the maximum exclusion being the greater of: (a) $10 million, or (b) ten (10) times the taxpayer’s basis in the stock.
In order to qualify as QSBS, the following requirements apply:
1. Issuer Qualifications. To qualify, the issuer (the company issuing stock) must:
a. Be a domestic C corporation at the time stock is issued and continuously thereafter. It cannot be an S corporation or limited liability company;
b. Use at least 80% (by value) of its assets in the active conduct of a qualified trade or business (which includes most technology, manufacturing, & healthcare companies, and excludes businesses engaged in professional services, finance, real estate, hospitality, and farming); and
c. Not have aggregate gross assets that exceed $50 million at any time before or immediately after the stock issuance.
2. Stock Issuance Requirements. The issued stock itself must:
a. Be acquired by the investor directly from the company (not from another shareholder); and
b. Be purchased in exchange for money, property (other than stock), or services rendered to the corporation.
3. Investor Holding Requirements. The stock holder must:
a. Hold the stock continuously for more than five (5) years (transfers to grantor trusts or by gift may still qualify); and
b. Be an individual, partnership, trust, or pass-through entity. It cannot be a C corporation.
The QSBS benefit can be lost if any of the following events occur:
- The corporation redeems any stock (within two years before or after).
- The corporation fails the active business test (1.b. above) (e.g., invests heavily in passive assets).
- The stock is converted to or issued by an S corporation or limited liability company before sale.
- The taxpayer fails the five-year holding period.
Changes under the OBBB
The OBBB changes the QSBS rules as follows:
1. The minimum holding period requirement has been reduced from five to three years, with a phased-in exclusion percentage of 50 percent for a three-year holding period, 75 percent for a four-year holding period, and 100 percent for a holding period of five or more years.
2. The maximum aggregate gross asset value for a qualifying C corporation issuer has been increased from $50 million to $75 million, indexed for inflation.
3. The single issuer flat cap on capital gains subject to exemption has been increased from $10 million to $15 million, indexed for inflation.
The changes to the (QSBS) rules under the (OBBB) are complex and can significantly impact the tax planning and investment strategies for both companies and investors.
To ensure your company's stock is properly structured to qualify as QSBS, or to understand how these new rules affect your current or future investments, it's essential to seek guidance from experienced legal counsel. Our team at Stock Legal can help you navigate these enhanced QSBS benefits and the broader implications of the OBBB.
Contact us to book a consultation with one of our corporate attorneys.
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