A key tax reform in the One Big Beautiful Bill Act of 2025 (OBBBA) encourages investment in small and emerging businesses by allowing founders and investors to reduce or eliminate tax on the capital gains from such investments.
Specifically, the OBBBA expanded the definition of Qualified Small Business Stock to include more businesses and allow a greater exclusion — up to $15 million per investor, per company.
Here is what you need to know.
What is Qualified Small Business Stock?
Qualified Small Business Stock (QSBS) allows individual investors to exclude up to $15 million of capital gains from federal income tax when selling stock in businesses that meet the QSBS criteria in Section 1202 of the Internal Revenue Code.
To qualify as QSBS:
- The issuing company must be a domestic C corporation.
- The company must have less than $75 million in gross assets at the time of issuance (it was $50 million prior to the OBBBA).
- The company must use at least 80% of its assets in an active business.
- The company cannot be in an industry specifically excluded by Section 1202 (the list includes certain service industries like law, finance, and healthcare).
- The investor must acquire the stock from the issuing company, not on the secondary market.
- The investor must hold the stock for at least 3 years to claim a partial exclusion, or 5 years for the full exclusion.
What Changed with the OBBBA?
The OBBBA introduced three major improvements for QSBS acquired after July 4, 2025.
1. Partial Exclusion after 3 years, full exclusion after 5 years
Prior to the OBBBA, investors had to hold QSBS for five years to receive any tax benefit. The recent changes allow a partial exclusion after only three years, with the full exclusion after five years.
Time Requirement Percentage of Capital Gain Excluded
3–4 years 50%
4–5 years 75%
5+ years 100%
This change gives founders and investors more flexibility to exit earlier without losing the tax benefits of QSSB.
2. Higher Exclusion Limit
The OBBBA allows investors to exclude up to $15 million of capital gains instead of the previous $10 million — and this amount will be indexed for inflation starting in 2027.
3. Expanded Eligibility for Companies
The OBBBA raised the gross asset threshold for QSBS eligibility from $50 million to $75 million. This change allows more mature or capital-intensive startups to qualify, including those in later funding rounds.
Benefits for Investors in Small and Emerging Businesses
- You can now partially exclude gains after just 3 or 4 years, reducing holding risk.
- The $15 million cap per investor, per company, allows you to take larger equity positions with the same tax advantages.
- QSBS gains remain exempt from the 3.8% Net Investment Income Tax and the Alternative Minimum Tax.
Key Planning Considerations for Founders and Emerging Companies
- Consider structuring your company as a C corporation to make your equity QSBS-eligible — venture capital often requires this anyway, but the lower corporate tax rates and QSBS eligibility make the C corporation a more attractive tax structure than ever before.
- Only stock acquired after July 4, 2025, qualifies for the new tiered exclusions and higher cap. Stock acquired before that date remains subject to the old rules: a 5-year holding period and a $10 million cap (or 10x the stock basis, whichever is greater).
Documentation
The IRS closely examines QSBS claims. To protect yourself from, you should keep records of:
- Stock purchase agreements
- QSBS eligibility certifications
- Financial records showing asset thresholds
- Proof of active business operations
State Tax Treatment
QSBS is a federal benefit; there may still be capital gains on the state level. Most states, including Ohio, tax the entire capital gain without regarding for QSBS. Other states, such as Kentucky and Indiana, allow some or all the QSBS deduction.
Final Thoughts
With careful planning, the 2025 QSBS reforms can unlock millions in tax savings for small business founders and their investors. At Wood + Lamping, we help founders and investors structure equity, preserve QSBS eligibility, and plan for tax-efficient exits. If you want to explore how the new rules apply to your situation, we are ready to help.
