A Beautiful Boost: How the One Big Beautiful Bill Supercharges Qualified Small Business Stock Benefits

By Josh Lapierre July 9, 2025

Note:  This article is one of many that BNN is publishing to cover the tax features of the so-called “Big Beautiful Bill.”  Each one is authored by one of BNN’s own tax professionals.  Our coverage includes a summary article that briefly describes many of the bill’s features and many more that are deeper dives into specific areas of interest to our clients.  A topical list of those in-depth articles may be found at the front of our summary article.

What is Qualified Small Business Stock (“QSBS”)?

An investor who acquires QSBS and retains it for more than 5 years can benefit from a federal tax gain exclusion upon the sale of the stock, assuming all requirements have been met by both the investor shareholder and the C Corporation itself. The amount of gain excludable depends on when the stock was originally acquired. Prior to the recent enactment of the One Big Beautiful Bill Act (“BBB”), Section 1202 of the Internal Revenue Code excluded from taxable income the greater of $10 million ($5 million for married filing separately) or 10 times the taxpayer’s basis in the QSBS, depending on when the stock was issued.

Shareholder level requirements

• Eligible shareholder: Generally, eligible shareholders include any type of stockholder other than C Corporations. In the case of a partnership or S Corporation, additional requirements must be met for the owner of the flow-through entity to claim the benefits. Tax-exempt and foreign shareholders are generally excluded from eligible shareholders.
• Holding period: Under current law, the qualified stock must be held for more than 5 years before it is disposed. Generally, the holding period begins on the date on which the stock was issued by the corporation. In certain circumstances, the owner’s holding period can include previous holding periods predating receipt via inheritance, gift, or distribution from a partnership.
• Original issuance stock: The shareholder must acquire the stock as original issuance from the corporation. Stock cannot be purchased from another shareholder, but as noted above can be acquired through inheritance, gift, or distribution from a partnership if that testator, donee, or partnership, respectively, acquired it from the corporation. The original issuance must be after August 10, 1993, and would qualify for different benefits depending on the issuance date, as shown in the summary chart below.

Observation: The stock has to have been issued directly by the corporation, but it doesn’t necessarily have to have been issued as part of its initial incorporation.

Corporate level requirements

• Eligible Corporation: The corporation must be eligible for substantially the full duration of the holding period including the date of issuance. An eligible corporation includes any domestic corporation other than an S Corporation, IC-DISC, RIC, REIT REMIC or cooperative. An LLC that has elected to be taxed as a C Corporation is eligible.
• Qualified Trade or Business requirement: The corporation must be engaged in a qualified trade or business. This generally excludes real estate, banking, leasing, investing, insurance, restaurants, hospitality, farming, mining and service-based business, such as law, healthcare, architecture, engineering, accounting, brokerage, and financial services,
• Active business requirement: The corporation must use at least 80% of the fair market value of the entity’s assets in the active conduct of the qualified trade or business. This must be satisfied during substantially all of the holding period. There is a separate limitation on the amount of working capital that is allowed to support the business. If the corporation holds real estate or owns stock in other corporations, it may fail the QSBS requirements.
• Gross Assets Limitation: The corporation must not have had more than $50 Million in gross asset basis prior to or immediately after the issuance of the stock. Once the test is met, the test is not reevaluated at a later date for that stock issuance. Generally the measurement is the gross tax basis of the assets of the corporation, but any assets contributed to a corporation including deemed contributed via LLC conversion are measured at their fair market value.

Observation: The $50 million cap on basis should not be confused with market value. Although assets contributed to the corporation are measured at fair market value, the other assets of the corporation, including goodwill or other intangibles, may have values much higher than this threshold without causing the corporation to flunk this test because the measurement is primarily based on basis rather than value.

• Redemption Transactions: Certain redemptions in a period of time preceding or following stock issuance can disqualify the stock as QSBS. This was enacted to limit situations in which investors were issued new stock and the funds invested were used to redeem other shareholders. Congress wants to spur new investments in small corporations.

What the One Big Beautiful Bill Changes:

The bill greatly enhances the benefits of the Section 1202 exclusion.  Specifically, in Section 70431 of the bill, it increases the corporate level asset ceiling, increases the exclusion, and allows for a phased-in QSBS benefit for shorter holding periods. Below is a comparison of the changes for QSBS.

Changes	Current Law (Stock acquired before the effective date)	BBB (Stock acquired after the effective date)
Holding Period	More than five (5) years	At least three (3) years
Gain Exclusion	100% for stock acquired after September 27, 2010 75% for stock acquired after February 17, 2009, and before September 28, 2010 50% for stock acquired after August 10, 1993, and before February 18, 2009.	Stock acquired after effective date 50% if held for three years 75% if held for four years 100% if held for five years or more
Max Gain Exclusion	Greater of $10 million or 10 times tax basis in the QSBS ($5 million for married filing separately).	Greater of $15 million adjusted for inflation beginning in 2027 or 10 times tax basis in the QSBS ($7.5 million for married filing separately).
Gross Asset Limit	$50 million	$75 million adjusted for inflation beginning in 2027

 

Observation: The expansion of QSBS provisions under the bill enhances the appeal of a C Corporation structure for founders and investors of start-up and certain small businesses. QSBS remains one of the few areas of the Internal Revenue Code that offers a federal capital gains exclusion – potentially resulting in permanent tax savings when all requirements are met.

State Tax Treatment

Not all states follow the federal treatment of QSBS. In states that do follow or allow some level of benefit of QSBS, the tax savings becomes more substantial.

Next Steps

With the expanded QSBS provisions now in effect, founders, investors, and dealmakers should revisit their entity structures and investment strategies. Consulting with tax advisors and legal counsel is essential to ensure compliance with the new rules and to fully leverage the potential for tax-free gains. Whether you’re launching a startup, planning an exit, or structuring a fund, now is the time to explore how QSBS can be a powerful tool in your long-term growth and wealth planning strategy.

Conclusion

The expansion of QSBS provisions under the One Big Beautiful Bill marks a pivotal moment for early-stage companies and small business acquirers including their backers. By enhancing the tax benefits and easing certain requirements, the legislation strengthens the case for C Corporation structuring and investment in innovation. As founders, sponsors, and investors assess their strategies, QSBS is poised to play an even more central role in fueling growth, rewarding risk, and shaping the next generation of American entrepreneurship.

For more information, please contact your BNN tax service provider at 800.244.7444.