Expanded Qualified Small Business Stock Rules

In a recent post, available here, we discussed the basic requirements and benefits of Internal Revenue Code Section 1202, which provides for the exclusion from income of certain gains realized with respect to the sale of qualified small business stock (“QSBS”).^[1]

Prior to the enactment of the One Big Beautiful Bill Act (“OBBB”) on July 4, 2025, non-corporate taxpayers were generally allowed to exclude up to 100%^[2] of gain from the sale or exchange of QSBS held for at least five years.  The gain exclusion was subject to a limit: the greater of $10 million, or 10 times the aggregate adjusted basis of the QSBS sold.

The OBBB expanded the aforementioned rules, as follows:

1. The holding period requirement is now tiered for stock issued after the OBBB’s enactment: 50% of gain may be excluded for QSBS held for three years; 75% for QSBS held for four years; and 100% for QSBS held for five years or more;
2. The gross asset threshold has been increased from $50 million to $75 million (indexed for future inflation); and
3. The exclusion’s $10 million floor was increased to $15 million (also indexed for future inflation).

These changes are taxpayer-friendly, and provide additional planning opportunities for founders and investors – particularly those who might not have benefitted under prior law.  For example, as discussed in our prior post, incorporating a partnership is one strategy taxpayers can use to increase their basis (i.e., with respect to the “10 times basis” rule mentioned above) for determining the amount of exclusion.  One major limiting factor for employing this strategy was the old $50 million limit on the company’s gross assets.  By increasing the gross asset limit to $75 million, the OBBB has given many additional taxpayers a chance to pursue this type of planning.

Additionally, at Farrell Fritz, P.C., we strive to provide seamless inter-departmental collaboration.  Oftentimes, income tax planning overlaps and compliments wealth and estate planning.  As my colleague, Evan Feder, recently discussed in a post, available here, the benefits of Section 1202 can be further increased through the use of properly planned gifting.

In any case, notwithstanding the OBBB’s helpful expansion of Section 1202, its granular rules remain nuanced and complex.  Accordingly, we encourage discussion with legal counsel and other trusted advisors regarding qualification and proper structuring, in order to accurately navigate and take advantage of this updated, valuable provision of tax law.

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[1] QBSS generally includes stock issued by domestic C corporations that (i) have gross assets valued below $50 million; and (ii) do not conduct certain non-qualifying trades or businesses.

[2] The 100% exclusion was, and remains available for stock acquired after September 24, 2010.