One Big Beautiful Bill Significantly Expands QSBS Benefits and Availability

On July 4, 2025, the One Big Beautiful Bill Act (the "OBBBA") was signed into law. The OBBBA made a number of significant changes to the Internal Revenue Code of 1986, as amended (the "Code"). We write to highlight a handful of important enhancements to the utility of Section 1202 of the Code, which provides an exclusion for gain recognized by a non-corporate taxpayer attributable to the sale of qualified small business stock ("QSBS"). The QSBS exclusion is likely familiar to many investors in small and medium-sized businesses; however, we anticipate that following the enactment of the OBBBA, Section 1202 and QSBS planning ideas will take on increased prominence and may become a routine part of the toolkit for many founders and private equity, venture capital and early-stage investors.

• What is Section 1202?
  • Section 1202 provides an exclusion of up to 100% of the gain from the sale of QSBS. The exclusion is subject to a number of conditions but, in general, QSBS is “C” corporation stock acquired at original issuance and held for more than 5 years (prior to the OBBBA), so long as at least 80% (by value) of the assets of the corporation are used by such corporation in a qualifying trade or business for substantially all of the taxpayer’s holding period of such stock. Prior to the OBBBA, the pre- and post-money valuation of the aggregate gross assets of the corporate issuer of QSBS could not exceed $50 million.
  • The magnitude of the exclusion is calculated on a taxpayer-by-taxpayer basis and is generally the greater of $10 million (prior to the OBBBA) and 10x the adjusted tax basis of the sold QSBS.
• What were the OBBBA changes?
  • Holding period phase-in 
    • Prior to the OBBBA, a shareholder of QSBS was required to hold such stock for more than 5 years in order to exclude any gain from the sale of such QSBS. For QSBS issued on or after July 5, 2025, the shareholder is required to hold such stock for a minimum of only 3 years to exclude 50%, 4 years to exclude 75%, or 5 or more years to exclude 100% of the gain from the sale of such QSBS. 
    • Takeaway: This adjustment removes a significant impediment attributable to the 5-year “cliff effect” under prior law. Stockholders that receive QSBS on or after July 5, 2025 have more flexibility to sell QSBS stock at the 3-year (or 4-year) mark and still obtain benefits from Section 1202, albeit at a lower exclusion than if held for 5 or more years. 
  • Size of issuer increased
    • Prior to the OBBBA, aggregate gross assets of the corporation could not exceed $50 million at any time before and immediately after the issuance of stock. For QSBS issued on or after July 5, 2025, this number has been increased to $75 million, subject to an inflation adjustment for taxable years beginning after 2026.
    • Takeaway: We expect that many more issuers will qualify under the expanded $75 million threshold, which will reach many “middle market” transactions.
  • Magnitude of exclusion increased
    • As discussed above, prior to the OBBBA, the QSBS gain exclusion per-taxpayer was the greater of $10 million and 10x the adjusted tax basis of the sold QSBS. For QSBS issued on or after July 5, 2025, the first prong of the calculation was modified—the QSBS gain exclusion is up to $15 million, subject to an inflation adjustment for taxable years beginning after 2026. The 10x adjusted tax basis prong of the calculation is unchanged and may still be useful in some situations.
    • Takeaway: The additional $5 million of available exclusion would generally represent a greater than $1 million federal income tax saving when applicable.