Corporate Law / 2 min read
Maybe the most significant part of the July 4, 2025, One Big Beautiful Bill Act are its provisions incentivizing small business owners, investors and entrepreneurs to form and invest in new businesses. Its update to Section 1202 of the Internal Revenue Code, which governs the capital gains exclusion for Qualified Small Business Stock (QSBS), provides a means for investors and owners of certain small and mid-sized businesses to earn up to $15 million without tax liability.
QSBS has offered a powerful incentive for those willing to invest early in and build high-growth companies since 1983. Under the old rules, investors could exclude up to 100% of capital gains from the sale of qualifying stock that they held for at least five years, subject to a cap of $10 million or 10 times their original investment, whichever was greater.
The Big Beautiful Bill keeps the heart of the QSBS benefit intact but broadens its scope and application in several key ways. Most notably, it introduces a tiered system that rewards earlier liquidity events. Investors can now exclude 50% of their gain if they hold QSBS for three years, 75% after four years, and the full 100% exclusion remains in place for those holding five years or longer. This flexibility is especially valuable for investors or employees who may need to exit before the traditional five-year mark but still want to retain meaningful tax advantages.
The legislation also expands the definition of qualifying companies. The gross asset limit for capital gains exclusion as QSBS raises from $50 million to $75 million, with automatic adjustments for inflation going forward. This broadens the pool of businesses that can offer QSBS eligibility, and it applies to capital-intensive sectors such as biotech, energy, and advanced manufacturing.
In addition, the flat exclusion cap on gains has increased from $10 million to $15 million, also indexed for inflation, while the alternative 10x investment cap remains unchanged. For many investors, particularly those who may not hit the 10x threshold, this higher flat cap offers a more substantial benefit. Another significant shift is the removal of Alternative Minimum Tax (AMT) complications. Previously, QSBS gains could be treated as AMT preference items, reducing the intended benefit. The OBBBA eliminates this quirk, simplifying tax planning and improving outcomes for high-net-worth individuals.
It’s worth noting that not every aspect of QSBS has changed. The same categories of qualifying businesses remain in place, meaning service-based businesses like law firms, medical practices, and hotels still do not qualify. Likewise, the existing complexity surrounding QSBS ownership through partnerships or S corporations remains, and we await further IRS guidance to clarify how the new rules will interact with these structures.
For business owners and investors, these updates are an opportunity to revisit existing strategies. Whether forming a new company, raising capital, or planning an exit, the OBBBA makes QSBS both more accessible and more valuable. As always, the details such as entity structure, timing of stock issuance, and proper documentation are critical to capturing the benefit.