Expansion of the Qualified Small Business Stock Exclusion

The Qualified Small Business Stock (QSBS) exclusion, codified under Section 1202 of the Internal Revenue Code, was first created in 1993 to encourage investment in emerging companies. At its inception, the provision allowed noncorporate investors to exclude 50% of capital gains from the sale of QSBS held for more than five years. Over time, Congress expanded the benefit: the exclusion rose to 75% in 2009 and then to 100% in 2010 for stock acquired after September 27 of that year. In order to qualify as a QSBS the following general  requirements need to be met.

• The entity must always have been treated as a C Corporation for federal income tax purposes.
• The entity must be a domestic entity conducting an active trade or business.
• The assets of the company didn’t exceed $50 million on or after the issuance of stock.
• The stock must have been acquired directly from company (no secondary market purchases).

If all requirements were met, the maximum exclusion was the greater of $10 million or 10 times the taxpayers basis in the stock.

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBB) into law, which included a significant expansion of QSBS exclusion. Under the new rules, stock acquired after July 4, 2025 now qualifies for gain exclusion on a phased in basis: 50% after three years, 75% after four years, and 100% after five years. The per-issuer gain exclusion cap has been raised from $10 million to $15 million, with inflation adjustments beginning in 2027. Additionally, the company asset threshold for QSBS eligibility has increased from $50 million to $75 million.

The QSBS exclusion should be considered if you plan to sell your company in the future.  A potential restructuring or the proper entity selection at start-up can help you take advantage of this provision when it is time to sell. This area of tax law is very complex, you should consult your tax advisor if you think it may apply to your business.