Significant Changes By The One Big Beautiful Bill Act To The Qualified Small Business Stock Provisions Of Section 1202

Key Takeaways

• The One Big Beautiful Bill Act represents the most significant expansion of QSBS tax benefits since 2010.
• Among other significant changes, the One Big Beautiful Bill Act introduces a tiered QSBS gain-exclusion regime for stock acquired after July 4, 2025, that allows 50%, 75%, and 100% exclusions after three-year, four-year, and five-year holding periods, respectively.
• Dollar amount thresholds relevant to the QSBS tax benefit regime have been updated and increased, including (1) an increase in the per-issuer dollar limitation on excludable QSBS gain from $10 million to $15 million, and (2) an increase in the aggregate gross-asset ceiling for an issuing corporation from $50 million to $75 million. These thresholds are now generally subject to future inflation adjustments.

After weeks of intense negotiation, Congress passed—and President Donald Trump signed into law on July 4, 2025—a comprehensive reconciliation package referred to as the "One Big Beautiful Bill Act" (the Act). The Act expands the tax benefits available under Section 1202 of the Internal Revenue Code (the Code).

Generally, Section 1202 of the Code permits non-corporate taxpayers to exclude some or all of the gain realized on the sale of Qualified Small Business Stock (QSBS) that is held for more than five years. While the QSBS exclusion had its inception in 1993, the exclusion became a more powerful tax planning tool in 2010 when the QSBS gain exclusion percentage was raised to 100% from the previous percentages of either 50% or 75%. Section 70431 of the Act changes Section 1202 of the Code in several significant ways and has the potential to make QSBS gain exclusion even more "big" and "beautiful" than it has become post-2010.

Some of the principal changes to Section 1202 contained in the Act, and discussed in this Update, are as follows:

• Creation of a tiered gain-exclusion regime that allows 50% and 75% exclusions after three-year and four-year holding periods, respectively.
• An increase in the per-issuer dollar limitation on excludable QSBS gain from $10 million to $15 million, which is subject to future inflation adjustments.
• An increase in the aggregate gross-asset ceiling for an issuing corporation from $50 million to $75 million, which is subject to future inflation adjustments.
• Confirmation that gain excluded under the new 50% and 75% tiers, as well as under the existing 100% rule, is not an item of tax preference for purposes of the alternative minimum tax (AMT).
• Effective-date and coordination provisions that require careful attention when issuing or disposing of QSBS during the transition period.

Each of these items is discussed in greater detail below.

Tiered Gain Exclusion for Post-July 4, 2025, QSBS

As noted above, depending on when a taxpayer acquired qualifying QSBS, prior law under Section 1202 of the Code granted either a 50%, 75%, or—if the stock was acquired after September 27, 2010—100% gain exclusion upon a sale or exchange of the stock. Such exclusions were available only if the taxpayer held the QSBS for more than five years prior to the applicable sale or exchange. New Section 1202(a)(5)-(6) of the Code introduces the following tiered gain exclusion structure for QSBS acquired after July 4, 2025, which is Post-Enactment QSBS.

The five-year 100% gain exclusion remains unchanged for qualifying QSBS acquired on or before July 4, 2025—which is Pre-Enactment QSBS. Moreover, the tiered gain exclusion windows generally should apply only to Post-Enactment QSBS; taxpayers cannot "restart" the holding period on Pre-Enactment QSBS to access the shorter windows. Specifically, the Act incorporates tacking principles under Section 1223 of the Code for purposes of determining when a taxpayer has "acquired" QSBS, which generally should mean that stock-for-stock exchanges—such as in a tax-free reorganization—will not allow taxpayers holding Pre-Enactment QSBS to convert such stock into Post-Enactment QSBS.

Increased Per-Issuer Dollar Cap

Section 1202(b) caps the amount of gain a taxpayer may exclude with respect to any single issuer in any taxable year at the greater of:

• The "per-issuer dollar limit," or
• 10 times the taxpayer's aggregate adjusted basis in the QSBS sold during that year

The Act raises the per-issuer dollar limit from $10 million to $15 million for Post-Enactment QSBS and provides for annual inflation adjustments beginning in 2027. Coordination rules prevent taxpayers from double-dipping across the old and new limits:

• Gain on Pre-Enactment QSBS continues to be subject to the original $10 million cap.
• Once the new $15 million limit has been fully utilized, subsequent inflation adjustments do not increase a taxpayer's cap with respect to that issuer.

The long-standing 10-times-basis limitation is unchanged. The Act also halves the per-issuer dollar limit—i.e., to $7,500,000 for Post-Enactment QSBS—for married individuals filing separate returns, consistent with the treatment under prior law.

Higher Aggregate Gross-Asset Ceiling

For stock to qualify as QSBS, the issuing corporation must be a "qualified small business," which, among other tests, requires that the corporation's "aggregate gross assets" not exceed a statutory threshold at any time before and immediately after the stock issuance. The Act increases this "aggregate gross assets" threshold from $50 million to $75 million for stock issued after July 4, 2025, with inflation adjustments beginning in 2027.

There are several points that issuers of potential QSBS should be aware of given this change effected by the Act:

• The higher ceiling may allow later-stage venture-backed corporations to issue QSBS in financing rounds that previously would have caused the company to exceed the prior $50 million aggregate gross assets cap.
• Corporations that were previously disqualified by the $50 million ceiling could revisit whether a Post-Enactment financing can now be structured to allow investors to be eligible for the benefits of QSBS with respect to stock issued in the financing.
• As under prior law, because the "aggregate gross assets" test is measured by reference to the issuer's tax basis in its assets, including subject to an exception for contributed property which is measured by such property's fair market value, careful valuation, and documentation at the time of issuance can be critical.

AMT Treatment Clarified

Under pre-existing law, QSBS gain excluded under the 100% rule for stock acquired after September 27, 2010, was not an AMT preference item—i.e., an increase in calculating a taxpayer's AMT. The Act extends this approach by amending Section 57(a)(7) of the Code to remove any AMT preference for gain excluded under the new 50% and 75% gain exclusion tiers, as well as for future 100% exclusions on Post-Enactment QSBS. As a result, taxpayers should not face AMT leakage when relying on the revised Section 1202 rules.

Effective Dates and Transition Rules

• The new tiered gain exclusion regime, the $15 million per-issuer cap, and the $75 million aggregate gross assets ceiling each apply only to stock acquired or issued after July 4, 2025.
• Taxpayers holding separate blocks of QSBS in a single issuer acquired both before and after the Act's enactment date of July 4, 2025, must track each QSBS block separately to determine the applicable exclusion percentage, dollar cap, and holding-period requirement.
• The Act does not alter various other QSBS rules, such as the prohibition on QSBS benefits for certain non-qualifying businesses and generally consisting of certain service-oriented businesses as well as certain financial businesses and those involving farming, natural resources, and hospitality. 

Final Thoughts

The Act represents a potentially significant expansion of Section 1202's QSBS benefits. Further QSBS guidance may be forthcoming to the extent that the U.S. Department of Treasury and the Internal Revenue Service issue interpretive guidance on QSBS and the changes implemented under the Act. In the interim, corporations, or investors considering issuing or acquiring, respectively, QSBS should consult with tax counsel to ensure that transactions are structured to capture, to the extent possible, the Act's expanded QSBS benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.