Qualified Small Business Stock After the OBBBA

Section 1202 was already one of the best deals in the code. In July 2025 it got better — and easier to reach.

A Tax Alpha Companies playbook for CPAs

The exit most owners don't plan for

Ask a business owner how their eventual sale will be taxed and most assume long-term capital gains, full stop. For the owner of a qualifying C corporation, that assumption can be off by an enormous margin — because §1202 may let them exclude much of the gain on the sale of their stock, potentially all of it, subject to the caps and holding periods spelled out below.

Section 1202, "qualified small business stock" (QSBS), has been in the code since 1993, but it spent years underused. The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, expanded it in three ways that matter — shorter holding periods, a bigger cap, and a wider eligibility ceiling — and in doing so turned a niche exit-planning tool into one that belongs in far more conversations.

The catch, and the reason it belongs in a planning newsletter rather than a compliance one, is that QSBS is won or lost years before the sale. By the time a client is at the closing table, the decisions that determine whether §1202 applies have already been made.

The core benefit

Section 1202 permits an eligible shareholder to exclude from gross income the gain on the sale of qualified small business stock, subject to a per-issuer cap. For stock that qualifies fully, the exclusion can reach 100% of the gain — no federal income tax, and no 3.8% net investment income tax, on the excluded portion.

The exclusion is capped at the greater of:

• a per-taxpayer dollar cap (see below), or
• ten times the taxpayer's adjusted basis in the stock disposed of during the year (the "10× basis" limitation).

For most founders, the dollar cap is the operative limit; for investors who put substantial capital in, the 10× basis figure can be far larger.

What the OBBBA changed — for stock issued after July 4, 2025

The expansion applies to stock issued after July 4, 2025 (the "applicable date"). Stock issued on or before that date keeps the prior rules entirely. This split-by-issuance-date is the single most important thing to get straight, because two clients with identical companies can face completely different §1202 regimes depending on when their stock was issued.

1. A tiered holding period replaces the five-year cliff.

Under prior law, QSBS had to be held more than five years for any exclusion — an all-or-nothing cliff. For newly issued stock, the OBBBA introduces a tiered schedule:

• 3 years held → 50% exclusion
• 4 years held → 75% exclusion
• 5+ years held → 100% exclusion

The five-year hold still delivers the full exclusion; the change is that partial relief now arrives earlier.

2. The per-issuer dollar cap rises from $10 million to $15 million.

The per-taxpayer dollar cap increases from $10 million to $15 million per issuer, indexed for inflation after 2026. The 10× basis alternative is unchanged.

3. The gross-asset ceiling rises from $50 million to $75 million.

To issue QSBS, a corporation's aggregate gross assets must stay at or below a ceiling, measured before and immediately after the issuance. The OBBBA raises that ceiling from $50 million to $75 million (indexed after 2026), pulling substantially larger and more mature companies into eligibility.

One consequence worth noting: because the 10× basis cap interacts with the higher gross-asset ceiling, the expanded rules raise the theoretical maximum exclusion well beyond $15 million for capital-heavy positions.

The catch on the partial tiers: the 28% rate

The tiered exclusion is genuinely valuable, but it is not as clean as "half your gain is free." The portion of the gain that is not excluded — the 50% still taxable on a three-year hold, for instance — is taxed at the 28% §1202 rate, not the ordinary 20% long-term capital gains rate.

So at three years, a client excludes half the gain and pays 28% on the other half. The effective rate on the whole gain at that tier is meaningfully higher than a naive "50% off" suggests. Only the five-year, 100% tier delivers the full, clean exclusion. The tiers are a reason to hold longer where possible, not a reason to sell at three years reflexively.

The requirements that have to be true — usually years earlier

The exclusion is generous precisely because the gate is narrow. Every one of these must hold, and most are set at or before issuance:

• C corporation. The issuer must be a domestic C corporation. An S corporation or LLC does not issue QSBS. This is the decision that most often forecloses §1202 before anyone thinks about it — an owner who organized as an S corp or LLC for good reasons years ago may have quietly closed the door.
• Gross-asset test. Aggregate gross assets must be at or below the ceiling ($75 million for post-OBBBA stock) at all times before and immediately after issuance.
• Original issuance. The stock must be acquired by the taxpayer at original issuance — from the company, for money, property, or services — not purchased from another shareholder.
• Active business requirement. At least 80% of the corporation's assets must be used in the active conduct of a qualified trade or business throughout substantially all of the holding period.
• What qualifies. The statute defines a qualified business by exclusion, so the practical rule is simple: if the company is not in one of the carved-out fields below, it generally qualifies. Section 1202 favors companies that make or sell something — technology and software, manufacturing, consumer and industrial products, wholesale and retail, and biotechnology and life sciences are the classic qualifiers, along with most other product-driven ventures.
• The excluded fields. Carved out are the service professions — health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage — together with any business whose principal asset is the reputation or skill of its employees, plus banking, insurance, financing, leasing, investing, farming, extractive industries (mining, oil and gas), and hospitality such as hotels and restaurants. The reputation-or-skill catch-all is broad and sweeps in many service businesses that do not obviously fit the named categories.
• Holding period. Met per the tiered schedule above.

The through-line: §1202 is an entity-selection and structuring question long before it is a sale question. The CPA who raises it when a client is forming a company, or a few years ahead of a contemplated exit, can shape the outcome. The one who meets it at the closing table usually cannot.

The levers when the gain exceeds the cap

A client whose gain will exceed the per-issuer cap is not out of options:

• Stacking through gifts. Because the cap is per taxpayer, per issuer, QSBS can be gifted to family members or non-grantor trusts, each of whom has their own $15 million exclusion. A donee who receives QSBS by gift is treated as having acquired it the same way, and on the same date, as the donor — so the holding period tacks. Done deliberately and in advance, stacking can multiply the total exclusion across a family.
• §1045 rollover. A shareholder who sells QSBS before meeting the holding period can defer the gain by rolling the proceeds into replacement QSBS within 60 days, provided the original stock was held more than six months. The replacement stock tacks the holding period, keeping the §1202 clock running toward the eventual exclusion.

Both levers reward advance planning and precise execution; neither is a rescue available at the last minute.

The honest counterweight

QSBS is a powerful benefit, and precisely because it is powerful, it invites a mistake: contorting a business into a C corporation solely to chase §1202.

The C-corporation election carries its own cost — a second layer of tax on distributed earnings, the loss of pass-through treatment, and structural rigidity — that has to be weighed against an exclusion the client may or may not ultimately capture. A business that will distribute most of its profits currently, or that may never sell, or that sits in an excluded service field, can easily be worse off inside a C corp than outside one. (This month's podcast pick — How Tax Works, "QSBS Part VI: Why You Probably Shouldn't Try to Qualify" — makes exactly this case, and it is worth an hour before a client restructures.)

The right posture is neither to ignore §1202 nor to chase it, but to model it against the alternative for the specific client, with the specific facts, over a realistic horizon.

The practitioner's checklist

1. Determine whether the client's stock was issued after July 4, 2025 — it decides which rule set applies.
2. Confirm the issuer is (or should be) a domestic C corporation.
3. Confirm the gross-asset test was met at and immediately after issuance.
4. Confirm original issuance and an active qualified business not in an excluded field.
5. Track the holding period against the tiered schedule; counsel toward the five-year, 100% tier where feasible.
6. Model the 28% rate on any non-excluded gain at the partial tiers.
7. Quantify the gain against the $15 million / 10× basis cap, and evaluate stacking through gifts to trusts or family where the gain exceeds it.
8. Know the §1045 rollover window in case a sale comes before the hold is complete.
9. Weigh the C-corporation cost against the projected benefit before recommending a restructuring.

Talk it through

QSBS rewards the client who plans years ahead and punishes the one who asks too late — and the OBBBA has widened the door enough that it belongs in more entity and exit conversations than it used to. If you have a client forming a company or heading toward a sale, it is worth putting §1202 on the table now.

Ross Brannon · Tax Alpha Companies
C: 850-566-7999 · ross@taxalphacompanies.com
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Dollar thresholds and inflation adjustments described here reflect the OBBBA as enacted July 4, 2025, with indexing beginning after 2026; verify current figures before relying on them. This material is provided for educational and informational purposes only and does not constitute legal, tax, accounting, or investment advice. The strategies discussed are general in nature and may not apply to specific individual circumstances. Any examples are hypothetical illustrations and are not a guarantee of any particular result. Tax laws are complex and subject to change; readers should consult qualified tax and legal professionals before acting on any strategy discussed.