Full-Service Law Firm solving complex challenges through bold thinking, precise execution, and shared purpose.

Full Service Law Firm | Michael Best & Friedrich LLP

Specializing in the Intersection of Business &amp; Government

Meet our team of trusted advisors, strategic thinkers, and community builders dedicated to client success.

Learn about our full-service legal and business solutions, designed to address complex challenges for leading organizations across industries.

Access thought leadership, news, and resources to stay informed about the latest trends, legal developments, and industry innovations.

Discover how partnership, bold thinking, and precise execution drive results for clients nationwide.

Explore how our national reach and local expertise support clients across the United States and beyond.

Grow at a firm designed to bring out your best.

A <a href="https://www.michaelbest.com/Newsroom/370611/Senate-Finance-Committee-Introduces-Expansion-to-Section-1202-QSBS-Exclusion">client alert</a> previously published on the Michael Best &amp; Friedrich LLP website described a proposed amendment of section 1202 of the Internal Revenue Code expanding the qualified small business stock gain exclusion. This client alert is updating that prior alert to reflect passage of the One Big Beautiful Bill Act, Public Law No. 119-21, H.R. 1 (the “OBBBA”), which was enacted on July 4, 2025.

core/paragraph

On July 4, 2025, President Trump signed the “One Big Beautiful Bill Act” into law. In addition to addressing pending lapses of certain provisions of the 2017 Tax Cuts and Jobs Act, the OBBBA also expands several provisions of the Qualified Small Business Stock (“QSBS”) gain exclusion found in Section 1202 of the Internal Revenue Code of 1986 (as amended, the “Code”).

core/heading

For stock acquired on or before July 4, 2025, the QSBS exclusion generally allows individuals and other non-corporate taxpayers to exclude from income up to<a name="_ftnref2"></a><a title="" name="_ftnref1" href="#_ftn1">[1]</a> the greater of $10 million ($5 million if married filing separately)<a name="_ftnref3"></a><a name="_ftnref2" title="" href="#_ftn2">[2]</a> or 10 times the aggregate adjusted bases of the taxpayer in the QSBS sold during a year.<a name="_ftnref3" title="" href="#_ftn3">[3]</a> To qualify for the exclusion, a number of shareholder- and corporate-level requirements must be met. For example, in order for any gain to be eligible for exclusion, the taxpayer must receive stock at original issue after August 10, 1993 in exchange for property or services (but not stock) and have held the QSBS for more than five years at the time of the sale.<a name="_ftnref5"></a><a name="_ftnref4" title="" href="#_ftn4">[4]</a> In addition, the entity into which the investment is made must be a domestic C corporation, and such C corporation (and any of its predecessors) must not have had, at any time from August 10, 1993 through immediately after the issuance of the stock, aggregate gross assets in excess of $50 million.<a name="_ftnref6"></a><a name="_ftnref5" title="" href="#_ftn5">[5]</a> Further, during substantially all of the taxpayer’s holding period for the stock, 80% or more of the assets (by value) of the C corporation must be used in the active conduct of one or more qualified trades or businesses (i.e., a business that is not a professional service firm, bank, farm, hotel, etc.).<a name="_ftnref7"></a><a name="_ftnref6" title="" href="#_ftn6">[6]</a> Note that the above is a brief summary of certain QSBS requirements and should not be viewed as a fulsome discussion of all QSBS requirements. In addition, there are restrictions on redemptions, transfers, and corporate restructurings which can also impact QSBS status, discussion of which is beyond the scope of this alert.

The OBBBA significantly expands the QSBS exclusion for stock acquired after July 4, 2025<a title="" name="_ftnref7" href="#_ftn7">[7]</a>, the date of the bill’s enactment.

First, the five-year holding period requirement is modified by introducing a phase-in system.<a name="_ftnref8"></a><a title="" name="_ftnref8" href="#_ftn8">[8]</a> For stock acquired after July 4, 2025, a taxpayer may exclude 50% of gain after a three-year holding period, 75% after a four-year holding period, and 100% after a five-year holding period.<a name="_ftnref9"></a><a title="" name="_ftnref9" href="#_ftn9">[9]</a> The phase-in therefore would enable holders of stock that would not have previously qualified for QSBS status due to a sale prior to holding such stock for at least 5 years to partially benefit from the exclusion. In addition, the excluded portion of any gain from QSBS held for more than 3 years but not more than 5 years would expressly not be treated as an AMT preference item.<a name="_ftnref10"></a><a title="" name="_ftnref10" href="#_ftn10">[10]</a>

core/list-item

Second, the exclusion ceiling is increased to the greater of $15 million ($7.5 million if married filing separately)<a title="" name="_ftnref11" href="#_ftn11">[11]</a> or 10 times the aggregate adjusted basis in the QSBS.<a title="" name="_ftnref12" href="#_ftn12">[12]</a> This means that stock acquired after July 4, 2025 and held for at least 3 but less than 4 years could potentially be taxed at a maximum rate of 15.9% (50% * (28% unexcluded 1202 gain rate under Section 1(h)(4)(A)(ii) + 3.8% net investment income tax)), while stock acquired after the date of enactment and held for at least 4 but less than 5 years would be taxed at a maximum rate of 7.95% (25% * (28% unexcluded 1202 gain rate under Section 1(h)(4)(A)(ii) + 3.8% net investment income tax)). Further, the exclusion ceiling benefits from cost-of-living adjustments for taxable years beginning in 2027.<a title="" name="_ftnref13" href="#_ftn13">[13]</a>

Third, the aggregate gross assets limit of the business would also increase from $50 million to $75 million, which would also benefit from cost-of-living adjustments starting in 2027.<a title="" name="_ftnref14" href="#_ftn14">[14]</a>

core/list

These changes would greatly increase the number of taxpayers eligible to exclude gain, the potential amount of gain eligible for exclusion, and the number of businesses that can issue QSBS in the first instance.

For more information or assistance regarding Section 1202, the changes provided in the One Big Beautiful Bill Act, or other tax issues, please contact a member of the Michael Best tax team.

core/separator

<cite><a title="" href="#_ftnref1" name="_ftn1">[1]</a> For stock acquired after September 27, 2010, the exclusion is 100%. A 50% or 75% exclusion may apply to stock acquired prior to that date, and with respect to such stock, 7% of the excluded gain is treated as an AMT preference item. IRC § 57(a)(7).</cite>

<cite><a title="" href="#_ftnref7" name="_ftn7">[7]</a> Note that, for stock acquired on or before July 4, 2025, attempting to restructure such stock ownership in a manner that would result in the stock being acquired after July 4, 2025 is complex and will very likely result in immediate tax ramifications which could reduce any benefit of the QSBS exclusion expansion under the OBBBA.</cite>

<cite><a title="" href="#_ftnref8" name="_ftn8">[8]</a> IRC § 1202(a)(5)-(6) (as modified by the OBBBA).</cite>

<cite><a title="" href="#_ftnref9" name="_ftn9">[9]</a> IRC § 1202(a)(5) (as modified by the OBBBA).</cite>

<cite><a title="" href="#_ftnref10" name="_ftn10">[10]</a> IRC § 57(a)(7) (as modified by the OBBBA).</cite>

<cite><a title="" href="#_ftnref11" name="_ftn11">[11]</a> IRC § 1202(b)(3)(A)(ii) (as modified by the OBBBA).</cite>

<cite><a title="" href="#_ftnref12" name="_ftn12">[12]</a> IRC § 1202(b)(4)(B) (as modified by the OBBBA).</cite>

<cite><a title="" href="#_ftnref13" name="_ftn13">[13]</a> IRC § 1202(b)(5)(A) (as modified by the OBBBA).</cite>

<cite><a title="" href="#_ftnref14" name="_ftn14">[14]</a> IRC § 1202(d)(1)(A), (d)(1)(B), (d)(4) (as modified by the OBBBA). Note that there is a technical error in the enrolled version of the OBBBA which appends what should have been new section 1202(d)(4) to the end of section 1202(b) (rather than section 1202(d)), meaning that the paragraph references in the added language do not actually adjust the $75M amount. OBBBA, Sec. 70431(c)(2) (providing that “Section 1202(b) [rather than Section 1202(d)] is amended by adding at the end the following:”). Presumably, a technical amendment will be made to correct this in due course.</cite>

Close-up of U.S. tax documents, including W‑2 and 1099‑G forms, stacked together.

Blurred close-up of financial documents with rows and columns of printed information.

One Big Beautiful Bill Act Significantly Expands Section 1202 QSBS Exclusion

Related People

Related Capabilities

You may also be interested in these

Are Recordkeeper Security Guarantees a Fiduciary Minefield?

Michael Best Attorney Nicole Murphey Appointed to North Carolina District Export Council

Family Business Succession: How to Start the Conversation (Without Starting a Fight)