Code section 1202 1 has long provided a powerful tax incentive for investors and founders in certain small businesses by way of the qualified small business stock (“QSBS”) exclusion of gain. The One Big Beautiful Bill Act (“OBBBA”),2 which was signed into law on July 4, 2025, included changes expanding the scope and potential benefits of Code section 1202.
OBBBA Changes
Prior to the OBBBA, Code section 1202 provided an exclusion for gains from the sale or exchange of QSBS held for more than five years, with the exclusion percentage varying depending on when the stock was acquired (e.g., 100% if acquired after September 27, 2010). One of the most significant changes under the OBBBA is the modification of this five-year holding period requirement and the introduction of tiered exclusion percentages available beginning as soon as three years after acquisition. Specifically, a 50% exclusion of gain from the sale or exchange of QSBS applies to stock held for at least three years, a 75% exclusion applies to stock held for at least four years, and a full 100% exclusion continues to be available for stock held for at least five years.3
In addition to the new exclusion percentages, the per-issuer gain exclusion limit has been increased from $10 million to $15 million, and this limit is now subject to annual adjustments for inflation, ensuring that the benefit remains relevant as economic conditions evolve.4 The alternative cap of 10 times aggregate tax basis in the QSBS was not affected by the OBBBA. The legislation also expands the “aggregate gross assets” test, raising the maximum aggregate gross assets a corporation may have to qualify as a small business from $50 million to $75 million, with this threshold also indexed for inflation.5
All of these changes generally apply to QSBS issued after July 4, 2025.
Tax Planning Strategies and Considerations
The expanded Code section 1202 regime opens new avenues for tax planning. Investors should pay close attention to the timing of stock acquisitions, as acquiring stock after July 4, 2025, may allow for higher exclusion limits and shorter holding periods. Careful tracking of acquisition dates is essential to maximize the applicable exclusion percentage.
Taxpayers may also consider structuring investments across multiple issuers to take full advantage of the increased per-issuer exclusion. This approach, often referred to as aggregation or stacking, can be particularly effective given the higher limits now in place. For businesses exceeding the pre-OBBBA $50 million asset threshold, it is important to evaluate the timing of stock issuances and capital infusions to remain under the new $75 million cap and preserve QSBS eligibility.
Limitations, Qualifications, and Compliance Issues
Despite the expanded benefits, several important limitations and compliance requirements remain. For example, the issuing corporation must still be a domestic C corporation, and at least 80% of its assets must be used in the active conduct of a qualified trade or business,6 and certain service businesses, financial institutions, and other specified activities remain ineligible for QSBS treatment.7
Further, the stock must still be acquired at original issuance, not in the secondary market, subject to limited exceptions,8 and the gain exclusion is still subject to per-issuer limits and minimum holding periods, as outlined above, which must be carefully documented and substantiated. Failure to comply with any Code section 1202 requirements (whether new or old) can jeopardize a taxpayer’s qualification for gain exclusion and result in unexpected tax liabilities.
Conclusion
The expansion of certain Code section 1202 requirements and benefits under the OBBBA represents a significant opportunity for corporate investors and business owners to achieve substantial tax savings on qualified small business investments. By understanding the new rules, leveraging strategic planning, and maintaining rigorous compliance, taxpayers can maximize the benefits of this incentive in an ever-evolving tax landscape.
Taxpayers interested in learning more about how the OBBBA may impact their tax planning should consult with a tax professional.
[1] References to the Code throughout this article refer to the Internal Revenue Code of 1986, as amended.
[2] One Big Beautiful Bill Act, H.R. Res. 1, 119th Cong. (2025) (enacted).
[3] Id. at § 70431(a).
[4] Id. at § 70431(b).
[5] Id. at § 70431(c).
[6] Code § 1202(c)(1), (e)(1).
[7] Code § 1202(e)(3).
[8] Code § 1202(c)(1)(B).
