The new tax law enhances the benefits: Qualified small business stock (QSBS) can be a powerful tax and estate planning tool, enabling eligible business owners—and their heirs—to exclude up to 100% of the capital gain when they sell their stock. The One Big Beautiful Bill Act (OBBBA) enhances the benefits of QSBS by shortening holding periods (for partial exclusions), increasing exclusion limits, and expanding the number of businesses that qualify.
How Does QSBS Work?
Internal Revenue Code Section 1202 allows individuals and other noncorporate taxpayers (including U.S. trusts and estates) to exclude from federal taxable income up to 100% of eligible capital gains on the sale of stock in a C corporation that meets the definition of a “qualified small business.”
To qualify, a business must meet a gross assets test and be “active,” meaning it uses at least 80% of its assets (by value) in one or more qualified trades or businesses. Additionally, no more than 10% of its assets may consist of nonbusiness real estate. Certain industries are excluded, such as professional services, finance, farming, mineral production, and hospitality.
To receive the 100% exclusion, shareholders must acquire the stock as part of an original issuance (directly from the corporation or underwriter) in exchange for money, property (other than stock), or services—and hold the stock for at least five years after issuance. For estate planning purposes, stock received by gift or inheritance qualifies for an exception, and the transferor’s holding period is added to the recipient’s.
What’s Changed Under the OBBBA?
The One Big Beautiful Bill Act makes three key changes to the QSBS framework:
- Shorter Holding Periods:
While taxpayers must still hold QSBS for at least five years for a 100% exclusion, new partial exclusions apply for shorter periods. For QSBS acquired after July 4, 2025, taxpayers may exclude:- Up to 50% of capital gain on stock held for at least three years, or
- Up to 75% of capital gain on stock held for at least four years.
The taxable portion is taxed at 28%, meaning effective rates of 14% and 7%, respectively. Gains may also be subject to the 3.8% net investment income tax.
- Higher Exclusion Limit:
The lifetime cap per issuer increases from the greater of $10 million or 10× basis to $15 million (indexed for inflation after 2026) or 10× basis for QSBS acquired after July 4, 2025. - Increased Asset Threshold:
The gross assets cap for a qualified small business rises from $50 million to $75 million (also indexed for inflation after 2026).
Estate Planning Benefits
By allowing shorter holding periods and increasing both the per-issuer cap and asset threshold, the OBBBA expands estate planning opportunities for C corporation owners. Gifting QSBS can remove future appreciation from your taxable estate while allowing recipients to benefit from tax-free gains.
Normally, gifting appreciated assets transfers your original tax basis, creating potential capital gains tax for the recipient. However, gifting QSBS preserves the exclusion opportunity—combining estate and income tax advantages in a single strategy.
QSBS “Stacking” Multiplies the Tax Benefits
A strategy known as “stacking” can amplify QSBS benefits. Because the exclusion applies to individuals and non-grantor trusts, gifting shares to family members or trusts allows each to claim their own exclusion.
For example, if Robert invests $200,000 in a C corporation and later sells his shares for $30 million, he can exclude $15 million in gains. If he gifts half his shares to an irrevocable nongrantor trust before the sale, both he and the trust can each claim a $15 million exclusion—allowing the entire $30 million sale to be tax-free.
A Powerful but Specialized Tool
QSBS offers extraordinary tax and estate planning advantages, now enhanced under the OBBBA. However, these opportunities aren’t right for everyone. Consult with your professional tax and estate planning advisors to determine whether QSBS fits your long-term goals.
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