The gain exclusion benefits for the sale of qualified small business stock (“QSBS”) have grown in popularity in recent years, in part due to the 2017 Tax Act’s reduction of the C corporation tax rate from a marginal rate of 35% to a flat 21%. Congress has now made QSBS even more appealing. Under the One Big Beautiful Bill Act (the “OBBB”), the gain exclusion from the sale of QSBS issued after July 4, 2025, has expanded from $10 million to $15 million per qualifying shareholder. In addition, the $15 million exclusion will be adjusted annually for inflation. For QSBS issued on or before July 4, 2025, the original $10 million gain exclusion still applies.

The OBBB also made changes to the QSBS holding period requirement, providing a phase-in of gain exclusion benefits rather than the previous cliff-vesting approach. For QSBS issued on or before July 4, 2025, no benefits are available for taxpayers who hold the QSBS for less than five years. For QSBS issued after July 4, 2025, 50% of the gain exclusion is available after a holding period of three years. 75% is available after four years. 100% is available after five years.

Section 1202 limits QSBS to stock issued by a corporation that on the date of issuance that was prior to July 4, 2025, had aggregate gross assets of no more than $50 million. The OBBB expands the $50 million limit to $75 million. Congress apparently intended the $75 million limit, like the gain exclusion amount, to be adjusted for inflation. Due to a typographical error in the OBBB, it does not properly do so. It is expected the typo will be corrected in future legislation so the $75 million gross asset test will be adjusted for inflation.

John G. Hodnette is a partner with Fox Rothschild, LLP in Charlotte.

August 13, 2025/by TAX