Our perspective

The One Big Beautiful Bill Act (OBBBA) included revisions to qualified small business stock (QSBS) provisions. Businesses and investors with holdings in QSBS-eligible companies should carefully reassess their unique situations. Taking proactive measures in response to these updates may enhance the potential tax advantages associated with their QSBS qualified stock. 

In particular, there are strategic opportunities to issue new shares in order to benefit from the revised rules and limitations applicable to stock issued on or after July 5, 2025. Stakeholders should also evaluate potential exit scenarios, including the structuring and timing of such transactions, and develop coordinated estate planning and income tax strategies to fully leverage the new provisions, especially where phased or layered exits may be contemplated.

Text of the OBBBA is available here: https://www.congress.gov/ bill/119th-congress/housebill/1/text. We include the relevant section in parentheses where appropriate.

What has changed

OBBBA implements several notable changes to QSBS rules and regulations.

The following is a summary of the most significant provisions, all of which apply only to shares issued on or after July 5, 2025: 

• New tiered holding period and exclusion framework (601(b)). Specifically:
• Shares held for at least 3 years are eligible for a 50% gain exclusion
• Shares held for at least 4 years qualify for a 75% exclusion
• Shares held for 5 years or more receive a full 100% exclusion

This represents a significant departure from the pre-OBBBA structure, which required a single minimum holding period of five years to qualify for the full exclusion.

• Higher maximum gain eligible for exclusion. The maximum gain eligible for exclusion has been increased to $15 million per issuer (or 10 times the taxpayer’s basis in the stock, whichever is greater), representing an increase from the prior $10 million exclusion limit (601(c)).
• Higher gross assets threshold. The gross assets threshold for the issuing corporation has been increased to $75 million, up from the previous limit of $50 million (601(d)).

Specific considerations

While the new accelerated holding periods under the revised QSBS provisions offer earlier access to partial gain exclusions, the associated benefits may be less favorable than they initially appear. 

Specifically, the portion of QSBS eligible gain that is not excluded, such as in cases where the stock is held for three or four years, is subject to a higher federal tax rate of 28%, rather than the current maximum long-term capital gains rate of 20%. This diminishes the relative tax advantage of holding shares for more than three but fewer than five years.

*Net investment income tax.

Further, the portion of gain not excluded under the partial exclusion rules may be subject to an alternative minimum tax (AMT) adjustment, which should be carefully reviewed in consultation with a qualified tax advisor.

A comprehensive discussion of transaction structuring and estate planning strategies is beyond the scope of this article. However, it is important to note that the recent changes, particularly the introduction of multiple holding periods and exclusion thresholds, create meaningful planning opportunities. These include structuring planning and transactions around share tranches with varying eligibility criteria, which may support more tailored and tax-efficient outcomes.

Next steps

Clients with investments in QSBS-eligible businesses are advised to engage their Pathstone advisor to evaluate their specific objectives and circumstances. Such consultations can assist in identifying opportunities and implementing strategic actions to maximize the advantages of QSBS planning.