QSBS Recent Changes: OBBBA and 2025 Legislative Updates to Section 1202

The landscape of Qualified Small Business Stock (QSBS) underwent significant modifications with the enactment of legislation known as the "One Big Beautiful Bill Act" (OBBBA) or Public Law 119-21 in 2025. These amendments, pivotal for investors and companies alike, adjusted crucial aspects such as eligibility thresholds, exclusion limits, holding period requirements, and exclusion percentages under Section 1202 of the Internal Revenue Code (IRC).

The Applicable Date: July 4, 2025

The legislation identifies July 4, 2025, as the critical "applicable date" [IRC §1202(a)(6)(A)], creating a clear demarcation between the previous and revised QSBS regulations. This date not only marks the enactment of the OBBBA but also sets the boundary for which set of rules—pre-amendment or post-amendment—an instance of stock acquisition falls under. Stocks purchased on or before this date are governed by the pre-amendment rules, while those acquired subsequent to this date fall under the new legislative framework.

Key Changes to QSBS Provisions

Increased Gross Asset Threshold

One of the more substantial changes is the increase in the aggregate gross assets cap of a qualified small business. Previously set at $50 million, the new limit has been elevated to $75 million [IRC §1202(d)(1)(A), (d)(1)(B)]. This adjustment means that from August 10, 1993, through the issuance date, and immediately thereafter, the aggregate gross assets must not exceed this new threshold. This change, effective for stock issued after July 4, 2025 [Pub. L. 119-21, §70431(c)(3)], expands the eligibility criterion, allowing larger businesses to qualify for QSBS benefits, thus potentially increasing investment in growing enterprises.

Increased Per-Issuer Exclusion Limit

The legislation also revises the exclusion limits for capital gains from QSBS:

• For stock acquired on or before the applicable date, the exclusion limit remains at $10 million or 10 times the adjusted basis, whichever is greater [IRC §1202(b)(4)(A)].
• For stock acquired post-applicable date, the limit increases to $15 million or 10 times the adjusted basis, whichever is greater [IRC §1202(b)(4)(B)], marking a significant uplift from $10 million.

Starting in 2027, this $15 million amount will be subject to inflation adjustments [IRC §1202(b)(5)], ensuring that the benefit remains economically relevant over time. This enhancement aims to incentivize longer-term investments in small businesses by providing a greater tax relief on returns as these enterprises grow.

Tiered Exclusion Percentages Based on Holding Period

The amendments introduce a tiered structure for exclusion percentages based on the holding period, which marks a departure from the flat rate previously applied:

• A 50% exclusion is available for stocks held for at least 3 years but less than 4 years.
• A 75% exclusion applies to stocks held for at least 4 years but less than 5 years.
• For stocks held for 5 years or more, a 100% exclusion is available [IRC §1202(a)(1)(B), (a)(5)].

This tiered approach, effective for taxable years beginning after July 4, 2025 [Pub. L. 119-21, §70431(a)(6)], encourages investors to maintain their investments for longer periods, aligning investor goals with the long-term growth trajectories of small businesses.

Reduced Holding Period Requirement

The revised holding period requirement is particularly noteworthy. Where previously a minimum of more than 5 years was necessary for any exclusion, the new rule sets the minimum at 3 years [IRC §1202(a)(1)(B)]. This change not only allows investors to access tax benefits sooner but also aligns with the lifecycle and capital needs of rapidly growing startups and small enterprises.

Summary of Changes Table

The following table succinctly encapsulates the key changes made by the OBBBA:

Aspect	Pre-Applicable Date (Stock Acquired ≤ July 4, 2025)	Post-Applicable Date (Stock Acquired > July 4, 2025)
Gross Asset Threshold	$50 million	$75 million
Per-Issuer Limit	$10 million	$15 million
Minimum Holding Period	More than 5 years	At least 3 years
Exclusion at 3 Years	Not available	50%
Exclusion at 4 Years	Not available	75%
Exclusion at 5 Years	50% (or 75%/100% for certain periods)	100%

Impact on Existing and Future QSBS

For stocks already held by investors as of the applicable date, the existing (pre-amendment) rules continue to apply, maintaining the status quo for investments made under the old framework. Conversely, stocks issued post-enactment fall under the new rules, potentially altering investment strategies and financial planning for both investors and companies.

Legislative History and Planning Implications

The OBBBA, enacted as Pub. L. 119-21 on July 4, 2025, represents a significant evolution in the tax treatment of small businesses and their investors. The adjustments to the QSBS provisions under Section 1202 reflect a legislative intent to bolster small business growth through enhanced investor incentives, thereby fostering economic development and innovation.

This page, last verified in January 2025, aims to provide a precise interpretation of these changes. However, as with all legal and tax matters, consulting with a qualified tax professional is advisable to navigate the specific implications of these changes on individual or corporate financial strategies.

Note: This analysis is based on the text of Pub. L. 119-21 and relevant sections of the IRC as of the last verification date. Tax law is subject to change, and the information provided here should not be considered a substitute for the advice of a tax professional.