QSBS Planning Remains Complicated

The One Big Beautiful Bill Act (OBBBA) expanded the benefits of Qualified Small Business Stock (QSBS), creating new opportunities for founders, investors, and growing businesses.

However, the legislation contains drafting errors that introduce new uncertainty around the determination and measurement of those benefits. For investors in private companies evaluating entity structures, ownership transitions or capital raises, understanding these potential issues can help avoid surprises down the road.

Why QSBS Matters

QSBS has long been one of the most valuable tax incentives available to investors in qualifying small businesses. In general, eligible shareholders of C corporations can exclude some or all of the gain from the sale of qualifying stock if certain requirements are met.

For qualifying stock acquired after July 4, 2025, the OBBBA made QSBS even more attractive by:

• Increasing one part of the gain exclusion limit from $10 million to $15 million;
• Expanding the gross asset threshold relevant to the small business from $50 million to $75 million; and
• Introducing a phased gain exclusion that allows partial benefits after three and four years (with the trade-off of an increased rate on the gains ineligible for exclusion), with the full exclusion available after five years.

These enhancements have prompted many business owners and investors to revisit QSBS planning strategies.

The Question: When Does the Clock Start?

One of the key requirements for QSBS benefits is the shareholder holding period. The longer qualifying stock is held, the greater the potential tax benefit, with full benefits available after five years for all QSBS.

The challenge is that recent changes to section 1202 may create uncertainty about when that holding period begins in certain situations where a carryover basis rule applies to acquired stock. Generally, such stock is treated as having a tacked holding period with respect to the exchanged property. This issue commonly arises when:

• A partnership or LLC converts to a C corporation;
• Existing business assets are contributed to a corporation in exchange for stock; or
• Certain venture capital financing instruments are issued.

At the center of the debate is whether the holding period should begin on the exchange date or the time when the exchanged assets were acquired. As amended, section 1202 includes contradictory rules regarding this beginning date in section 1202(a)(6) and section 1202(i)(1)(A).

Why the Issue Matters

Although the discussion can seem highly technical, the implications are significant.

Depending on how the rules are interpreted, the answer could affect:

• Whether the shareholder’s stock satisfies the required holding period;
• Whether shareholders qualify for the new $15 million exclusion limit; and
• Which gain exclusion percentage is available upon sale of the stock.

For example, a long-standing LLC (treated as a partnership) that converts to a C corporation will generally have a holding period for its assets that begins prior to the conversion date. The contradictory rules now present in section 1202 create uncertainty as to the three questions previously highlighted.

Treasury Guidance Is Being Requested

The uncertainty has attracted attention beyond the tax planning community.

Industry groups and tax professionals have requested additional guidance from Treasury and the IRS regarding how acquisition dates, holding periods, and other QSBS rules should be applied following the OBBBA changes.

At the same time, practitioners have highlighted the drafting inconsistencies discussed herein that could lead to differing outcomes that may not be align with Congressional intent.

What Businesses Should Do Now

Businesses considering a conversion to C corporation status, evaluating financing structures or planning future exits should carefully analyze how QSBS rules may apply to their specific facts.

The enhanced QSBS benefits present meaningful opportunities. The timing of stock acquisition is integral to these opportunities and may have a greater impact than many organizations realize.

With potentially millions of dollars in future tax benefits at stake, early planning has become more important than ever.

How CBIZ Can Help

As QSBS planning becomes more complex, CBIZ can help businesses and investors evaluate how the expanded benefits may apply to their specific facts, including holding periods, acquisition dates, entity conversions, and future exit planning. Contact us to discuss your QSBS strategy and identify opportunities to strengthen your tax position while guidance continues to evolve.