Qualified Small Business Stock Enhanced in New Tax Bill

The new tax bill updates the qualified small business stock (QSBS) rules and enhances the benefits for certain investors.

There are many requirements to achieve full gain exclusion, including:

• A 5-year holding requirement
• Conducting a qualified business
• Certain business value limitations

There are also limitations on the total amount of gain that can be excluded by an investor and differing rules depending on the date the stock was originally issued. And only stock in entities classified as C-corporations for tax purposes (including LLCs taxed as C corporations) can be QSBS.

Below are the new, material changes made to the treatment of QSBS as part of this new tax legislation.

These changes only generally apply to QSBS issued after July 4, 2025, the effective date of this new legislation.

5-Year Hold Requirement

As originally enacted, a QSBS holder could only claim the gain exclusion after holding the QSBS for at least five years. There is now a graduated holding period:

• For QSBS held for 3 years, a selling shareholder can claim a 50% gain exclusion
• For QSBS held for 4 years, a selling shareholder can claim a 75% gain exclusion
• For QSBS held for 5 years or more, a selling shareholder can claim a 100% gain exclusion

Gain Exclusion Calculation

The maximum gain a QSBS holder could traditionally exclude equaled the greater of $10 million or 10 times the holder’s basis in the QSBS. For example, an investor with $1 million of qualified basis who then sells QSBS after a 5-year hold can exclude up to $10 million of gain.

The new, updated statute now allows an otherwise qualified QSBS holder to exclude the greater of $15 million (indexed for inflation) or 10 times the holder’s basis in the QSBS. Under the above example, the investor, for stock issued after the effective date, could exclude up to $15 million of gain.

Various methods to maximize the gain exclusion appear to remain viable, including gifting QSBS (so called “stacking”) and converting tax partnerships (including LLCs taxed as partnerships) to C-corporations to maximize the 10 times basis rule.

Gross Asset Test

Only corporations with gross asset values (as defined under section 1202) under $50 million traditionally could issue QSBS. This amount has now been updated to $75 million, allowing more businesses to qualify.

Next Steps for Qualified Small Business Stock

Many of the QSBS requirements remain unchanged, including the requirement that the subject C corporation conduct a “qualified business” and avoid certain disqualifying transfers and transactions.

Our experienced tax team can help you make sense of the new tax legislation, including assisting with formation planning, strategies to maximize the gain exclusion, and avoiding traps that could reduce or jeopardize the gain exclusion.