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A client alert previously published on the Michael Best & 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.

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”). 

QSBS Exclusion for Prior-Acquired Stock
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[1] the greater of $10 million ($5 million if married filing separately)[2] or 10 times the aggregate adjusted bases of the taxpayer in the QSBS sold during a year.[3] 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.[4]  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.[5] 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.).[6] 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.

QSBS Exclusion Expansion Under the OBBBA
The OBBBA significantly expands the QSBS exclusion for stock acquired after July 4, 2025[7], the date of the bill’s enactment. 

• First, the five-year holding period requirement is modified by introducing a phase-in system.[8] 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.[9] 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.[10]
• Second, the exclusion ceiling is increased to the greater of $15 million ($7.5 million if married filing separately)[11] or 10 times the aggregate adjusted basis in the QSBS.[12] 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.[13] 
• 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.[14] 

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.