Internal Revenue Code section 1202 was originally enacted in 1993 to encourage investment in small businesses by providing a 50% exclusion of gain from the sale of qualified small business stock (QSBS) held for at least five years by shareholders other than C corporations. Since late 2010, the available exclusion was increased to 100%.
OBBBA Amendments
Significant changes to the QSBS tax exclusion under the One Big Beautiful Bill Act (OBBA) enhance the potential rewards for founders, employees, and external investors, with significant tax savings on capital gains from the sale or exchange of eligible stock. OBBBA amendments to section 1202 provide a permanent tiered gain exclusion for qualified C corporation small business stock issued after July 4, 2025, as follows:
- 50% for QSBS held at least three years
- 75% for QSBS held for at least four years
- 100% for QSBS held at least five years
The amount of eligible gain that is not subject to the exclusion because of the shortened holding periods is taxed at a special rate of 28%, instead of the 20% maximum long-term capital gains rate. This amount is still subject to the net investment income tax, as well.
Other QSBS Changes Under the OBBBA
- A gain exclusion limit of the greater of $15 million (indexed for inflation) or 10 times basis
- For the issuer, a gross asset cap of $75 million immediately before or after issuance, indexed for inflation
For stock issued after July 4, 2025, the OBBBA favorably raised each of these figures from their historical levels of $10 million and $50 million, respectively. Note that these changes don’t automatically apply at the state level. Some states, including Alabama, California, Mississippi, and Pennsylvania, don’t conform to federal section 1202 and fully tax gains from QSBS. Additional states have decoupled from expanded QSBS rules under recent legislation.
ArticleQualified Small Business Stock Questionnaire
Explore the Small Business Stock Questionnaire to help assess your financial readiness and investment potential.
Strategic Planning
If you own stock issued both before and after the effective date of the OBBBA, work with your tax advisor to plan the best order to sell your shares to maximize your tax benefits. Stock issued before July 5, 2025, is subject to the five-year holding period, the $10 million/10 times basis cap, and the $50 million asset limit. Taxpayers may not exchange older stock for new stock to qualify under the new rules.
Do You Qualify?
There are many rules required to qualify as QSBS that were unaffected by the OBBBA. CBIZ has developed a QSBS questionnaire to help eligible shareholders determine whether any common or preferred stock they hold qualifies as QSBS. For federal tax purposes, shareholders who sell QSBS are eligible to exclude up to 100% of the gain they realize, depending on the date the stock was acquired and the length of time it was held. Note that state tax conformity with these federal QSBS rules varies.
