The Qualified Small Business Stock (QSBS) exclusion has been significantly expanded with the passage of the One Big Beautiful Bill (OBBB) Act on July 4, 2025. This change could mean savings of thousands or even millions of dollars in taxes for those who invest in small businesses.
Here’s a high-level overview on what QSBS is and what’s changed with the OBBB. We recommend speaking with your own CPA and/or business attorney about what these changes could mean for your business.
What is the QSBS Exemption?
The QSBS exemption incentivizes investment in small businesses. It allows investors, startup founders, early employees, and others to drastically reduce – or entirely eliminate – taxes on capital gains from certain qualifying stocks.
The amount that can be excluded is the greater of:
- $15 million in capital gains or
- 10 times the adjusted basis
for qualifying stocks issued after July 4, 2025. (The pre-OBBB limit of $10 million applies to QSBS purchased before this date.)
The exemption amount applies per issuer, meaning if an investor separately invests in ten companies, he or she could potentially have 10 x the $10 million or $15 million cap (depending on when the stock was purchased).
What Qualifies as a Qualified Small Business Stock?
Only certain shares in U.S. C corporations that meet the following criteria from 26 U.S. Code Section 1202 of the Internal Revenue Code qualify as QSBS:
- Domestic C corporation only
- Excludes many industries, including health, law, consulting, performing arts, brokerage services, banking, financing, farming, and more
- Corporation’s gross assets cannot be more than $75 million when stock is issued
- Business must be active, with at least 80% of assets used to conduct business
- Stock must be purchased directly from the corporation itself
- Stock must be held for at least three years to get any tax benefits, and at least five years to get full tax benefits
- Stock must be issued after Aug. 10, 1993
Individuals, trusts, and pass-through entities can hold QSBS and take advantage of the exemption. C corporations are the only entity that can issue QSBS, but they are not allowed to benefit from the QSBS exemption themselves.
How Has the QSBS Exemption Changed with the One Big Beautiful Bill Act?
Previously: The exemption limit per issuer was $10 million (or 10 times the adjusted basis).
Now: The exemption limit is now $15 million (or 10 times the adjusted basis) for stocks purchased on or after July 4, 2025. This amount will be adjusted for inflation starting in 2027.
Previously: QSBS needed to be held for at least five years to get the tax benefits. It was all or nothing; if the shares were sold before five years, there was no tax benefit.
Now: It’s no longer an “all-or-nothing” scenario; for QSBS purchased on or after July 4, 2025:
- 50% exclusion available for stocks held between 3 and 4 years
- 75% exclusion available for stocks held between 4 and 5 years
- 100% exclusion available for stocks held at least 5 years
Previously: To qualify, a corporation could have no more than $50 million in assets at the time the stock was issued.
Now: To qualify, a corporation must have no more than $75 million in assets at the time stock is issued. This amount will be adjusted for inflation starting in 2027.
Strategy and Legal Help for Businesses in South Carolina
Gem McDowell is a business attorney with over 30 years of experience handling business and commercial real estate transactions in South Carolina. Gem and his team help businesses protect their interests, grow, and thrive, while helping business owners and professionals protect their own interests, too. Give Gem a call at the Gem McDowell Law Group, with offices in Myrtle Beach and Mt. Pleasant, SC, at (843) 284-1021 today to schedule your free consultation.
