WHAT IF YOUR NEXT ADVANTAGE WAS A TAX CHANGE?

If you’re building or backing a growing company, the moment you sell can feel like a second negotiation, only this time, with taxes. The OBBBA has changed that balance by expanding the Section 1202 qualified small business stock (QSBS) gain exclusion, making the benefit larger and easier to reach.

Here’s the practical takeaway: for QSBS issued after July 4, 2025, investors can potentially qualify for meaningful gain exclusion sooner, with a higher minimum exclusion amount and a bigger definition of “small” for eligibility purposes. In other words, more deals may fit, more shareholders may benefit, and exit timing may become more flexible.

Key changes to Section 1202 under the OBBBA

Importantly, each of these changes only applies to stock issued after July 4, 2025:

• Shorter holding periods. The holding period for QSBS to qualify for the 100% tax exclusion has always been five years, but the OBBBA now phases in the exclusion between Years 3 and 5. 
• Increased exclusion cap. Originally set in 1993, the gain exclusion under Section 1202 was capped at the greater of $10 million or 10x basis for each taxpayer, but the OBBBA increases the minimum gain exclusion from $10 to $15 million, with annual inflation adjustments.
• Higher asset threshold. The OBBBA increases the “aggregate gross assets” limit for a corporation from $50 to $75 million, along with continued inflation adjustments.

How will these changes impact both investors and corporations?

By creating significant opportunities for both investors and the corporations, they invest in for many years to come.

• Once disqualified, corporations may qualify again. Corporations that previously surpassed $50 million of gross assets but stayed under $75 million may be able to issue QSBS again. 
• Companies may qualify for longer. Corporations will qualify to issue QSBS for a longer window of time because many of the other OBBBA changes generally decrease the tax basis of a corporation’s assets.
• Investors in later rounds of investment may qualify. The phased-in exclusion for investors that have held their stock for only three years, coupled with the increased gross asset limit to $75 million (plus the future inflation adjustments), make it easier for investors in later rounds to qualify.
• Refreshing old stock into new QSBS. If a corporation was formed in the recent past with an investment that immediately exceeded the $50 million asset limit, that corporation may be able to undergo a taxable liquidation followed by a reincorporation in order to be treated as having issued new stock under the new rules.
• Incorporation of a partnership. There are significant Section 1202 savings available when a partnership converts into a C corporation.