QSBS Planning in the New Landscape: Unlocking Benefits in a Post-OBBBA World 

By: Anthony Santoro, Esq. and Kyle Cunningham, EA

I.  Executive Summary

The One Big Beautiful Bill Act (“OBBBA”), signed into law on July 4, 2025, significantly expanded the qualified small business stock (QSBS) exclusion under Section 1202 of the Internal Revenue Code. These changes represent the most meaningful overhaul of the QSBS regime since Congress extended the 100% exclusion in 2010.

This article summarizes the key statutory changes, analyzes planning opportunities and traps, and provides examples  planning strategies to consider. All changes apply to QSBS issued after July 4, 2025; pre-OBBBA stock continues to be governed by prior law.

II.  Statutory Context: Section 1202 Before the OBBBA

Section 1202, enacted as part of the Omnibus Budget Reconciliation Act of 1993, was designed to encourage investment in early-stage domestic C corporations by allowing noncorporate taxpayers to exclude capital gains on qualifying stock dispositions. The principal requirements under prior law were:

• The issuing entity must be a domestic C corporation with aggregate gross assets not exceeding $50 million at the time of issuance.
• The stock must be acquired at original issuance (not in a secondary transaction) for money, property, or services.
• The taxpayer must hold the stock for more than five years — an “all or nothing” threshold.
• The exclusion is capped at the greater of $10 million or 10 times the taxpayer’s adjusted basis in the stock per issuer.
• The corporation must be an active business in a qualifying trade or business (excluding hospitality, financial services, law, health, and certain other service industries) throughout substantially all of the taxpayer’s holding period.

For stock acquired after September 27, 2010, the exclusion was 100% of eligible gain, with no alternative minimum tax (AMT) preference. Prior-period stock enjoyed 50% or 75% exclusions depending on acquisition date.

Source: McGuireWoods LLP, “One Big Beautiful Bill Act Provides Expanded Tax Benefit Opportunities for Qualified Small Business Stock Investors”

III. Understanding Key Changes in the OBBBA

The OBBBA enacted three principal amendments to Section 1202, each applying exclusively to QSBS issued after July 4, 2025.

A.  Graduated Holding Period with Tiered Exclusion

Under prior law, the five-year holding period was mandatory to access any exclusion. The OBBBA converts this binary requirement into a graduated schedule:

Note: The includible gain on partial dispositions (3- and 4-year holds) is taxed at the special 28% capital gains rate under Section 1202, not the standard 15%/20% long-term capital gains rate. Investors holding QSBS with a 3- or 4-year holding period should compare the effective rate against the standard capital gains rate applicable to non-QSBS stock before concluding that an early exit is beneficial.

B.  Increased Per-Taxpayer, Per-Issuer Gain Exclusion Cap

The maximum eligible gain that may be excluded per taxpayer, per issuing corporation is increased from $10 million to $15 million for QSBS issued after July 4, 2025. Beginning in 2027, this cap is subject to annual inflation adjustment. The 10x-basis alternative remains in place — the exclusion equals the greater of $15 million or 10 times the taxpayer’s adjusted basis.

Key planning point: The $10 million and $15 million caps are not additive. A taxpayer cannot stack pre-OBBBA and post-OBBBA QSBS from the same issuer to obtain a combined $25 million exclusion. However, where a taxpayer holds both pre- and post-OBBBA stock from the same issuer, selling the pre-OBBBA stock first (subject to the $10 million cap) and reserving post-OBBBA stock for a subsequent sale (subject to the $15 million cap) may maximize total excluded gain — effectively allowing up to $25 million across two separate transactions.

C.  New Increased Aggregate Gross Asset Threshold Explained

The gross asset threshold that the issuing corporation must satisfy for its stock to qualify as QSBS is increased from $50 million to $75 million, applicable to stock issued after July 4, 2025. This threshold is also subject to inflation adjustment starting in 2027.

The pre-OBBBA $50 million threshold remains applicable to stock issued on or before July 4, 2025. Notably, a corporation that previously reached the $50 million threshold without issuing QSBS may begin issuing qualifying QSBS on July 5, 2025, until it reaches the new $75 million threshold — provided all other requirements are met.

IV. Old vs. New Rules — A Summary Comparison Guide

V.  Practical Examples of Planning Strategies

Below, we will consider some hypothetical examples demonstrate how certain planning strategies may work to your advantage.

The following examples assume all basic QSBS requirements are met (domestic C corporation, original issuance, active qualified business, etc.). Federal tax calculations use a 28% rate on includible QSBS gain and a 23.8% rate (20% + 3.8% NIIT) on non-QSBS long-term capital gain for comparison purposes.

Example 1: Founder with Low Basis (Pre- vs. Post-OBBBA)

Scenario: Maria, a founder, received 1,000,000 shares of Tech-Co (a domestic C corporation) in August 2025 at a basis of $0.50/share ($500,000 total). The company was valued at less than $75 million at issuance. In 2030 (5 years later), Tech-Co is acquired and Maria’s shares are valued at $20 million — a $19.5 million gain.

Analysis:

• The exclusion cap is the greater of $15 million or 10x basis ($5 million). Therefore, the cap is $15 million.
• Maria excludes $15 million of gain; the remaining $4.5 million is includible and taxed at 28%, yielding $1,260,000 of federal tax.
• Without QSBS, Maria’s $19.5 million gain at 23.8% would produce $4,641,000 of federal tax.
• Net QSBS benefit: approximately $3,381,000 in federal tax savings.

Compare to pre-OBBBA: Under the old $10 million cap, Maria would have excluded $10 million, paid 28% on $9.5 million ($2,660,000), and saved only $1,981,000 in tax — $1.4 million less than under the OBBBA.

Example 2: Investor with High Basis (10x Applies)

Scenario: A venture capital fund (held through a pass-through to a noncorporate taxpayer) invested $2,000,000 in Series A stock of Bio-Startup in September 2025. Bio-Startup had $60 million in gross assets at issuance (qualifying under the new $75 million threshold). Five years later, the investment is sold for $25 million — a $23 million gain.

Analysis:

• The exclusion cap is the greater of $15 million or 10x basis ($20 million). Therefore, 10x basis applies — $20 million excluded.
• The remaining $3 million of gain is includible and taxed at 28% ($840,000 federal tax).
• Without QSBS, the $23 million gain at 23.8% would yield $5,474,000.
• Net QSBS benefit: approximately $4,634,000 in federal tax savings.

Note: Under pre-OBBBA rules, Bio-Startup would not have qualified (gross assets exceeded $50 million). The OBBBA’s $75 million threshold is what enables this planning opportunity.

Example 3: Evaluating Early Exit (3-Year Hold) vs. Holding Longer

Scenario: David invested $1,000,000 in Clean-Energy Corp in October 2025. In October 2028 (3 years), he receives an acquisition offer yielding $8 million total ($7 million gain). He considers whether to sell now or wait another year.

Option A: Sell at 3 years (50% exclusion):

• Excluded gain: $3.5 million. Includible gain: $3.5 million taxed at 28% = $980,000 federal tax.
• Effective federal rate on total gain: approximately 14%.

Option B: Sell at 4 years (75% exclusion, assuming same $8M value):

• Excluded gain: $5.25 million. Includible gain: $1.75 million taxed at 28% = $490,000 federal tax.
• Effective federal rate on total gain: approximately 7%.

Conclusion: Waiting one additional year saves approximately $490,000 in federal tax. If the investment is expected to appreciate during year 4, the case for waiting strengthens further. Clients should weigh investment risk, liquidity needs, and state tax consequences before deciding.

Example 4: Sequential Sale Strategy (Pre- and Post-OBBBA Stock from Same Issuer)

Scenario: Susan holds two blocks of shares in App-Ventures, Inc.: (i) 500 shares acquired in January 2023 (pre-OBBBA, basis $100,000) and (ii) 500 shares acquired in August 2025 (post-OBBBA, basis $150,000). App-Ventures is acquired in 2030.

Strategy:

• Block 1 (pre-OBBBA): $10 million exclusion cap (greater of $10M or 10x $100K = $1M). Susan sells Block 1 first, excluding up to $10 million.
• Block 2 (post-OBBBA): $15 million exclusion cap (greater of $15M or 10x $150K = $1.5M). Susan sells Block 2 in a subsequent tax year, excluding up to an additional $15 million.
• Combined maximum exclusion: $25 million — $15 million more than if only pre-OBBBA rules applied.

Caution: The IRS may scrutinize transactions designed to artificially separate sales into different tax years. Substance and non-tax business purposes are essential.

Example 5: SLANT Stacking: Spousal Lifetime Access Non-Grantor Trust

Background: A Spousal Lifetime Access Non-Grantor Trust (“SLANT”) is an irrevocable trust structured so that (i) it is not treated as a grantor trust for income tax purposes, meaning it files its own tax return as a separate taxpayer, and (ii) the grantor’s spouse is a permissible discretionary beneficiary, providing indirect family access to trust assets during the grantor’s lifetime. Because the SLANT is a separate non-grantor taxpayer, it can independently hold QSBS and claim its own Section 1202 exclusion cap, potentially stacking exclusions beyond what the founder and spouse could claim individually.

Scenario: James is a co-founder of Data-AI Corp, a domestic C corporation that issued QSBS after July 4, 2025. James’s total adjusted basis in his QSBS shares is $3,000,000. Before the company raises its next funding round (while its gross assets are still well below $75 million), James transfers a portion of his QSBS to two separate entities, each of which independently acquires the stock at original issuance or via a qualifying transfer:

• James holds shares personally (basis: $1,500,000).
• A SLANT (irrevocable non-grantor trust, sited in a non-income-tax state such as Nevada or South Dakota, with James’s spouse as a discretionary beneficiary) acquires shares at original issuance with a basis of $1,500,000, funded by James via a completed gift using his remaining lifetime exemption.

Seven years later, Data-AI Corp is acquired. The total enterprise value attributable to James’s combined shares reflects a $50 million gain ($25 million to James personally, $25 million to the SLANT).

Analysis: Without the SLANT:

• James’s per-issuer cap: the greater of $15 million or 10x basis ($30 million). Cap = $30 million.
• James excludes $30 million; the remaining $20 million of gain is taxed at 28% = $5,600,000 federal tax.

Analysis: With the SLANT:

• James personally excludes $25 million of gain (within his $30 million cap). Zero federal tax on his share.
• The SLANT, as an independent non-grantor taxpayer, has its own cap: the greater of $15 million or 10x its basis ($15 million). Cap = $15 million. The SLANT excludes $15 million; the remaining $10 million is taxed at the trust’s applicable rate (28% on QSBS gain) = $2,800,000.
• Combined federal tax: $2,800,000. Net tax saving vs. no SLANT: approximately $2,800,000. Total excluded gain across both taxpayers: $40 million out of $50 million.

State tax benefit: Because the SLANT is a non-grantor trust sited in a non-income-tax state (e.g., Nevada), and neither James nor his spouse is treated as the trust’s taxpayer for income tax purposes, the trust’s QSBS gain, both excluded and partially includible, may avoid state income tax entirely, even if James is domiciled in a high-tax state such as California or New York.

VI.  Key Planning Considerations and Cautions

A.  State Tax Conformity

Not all states conform to the federal QSBS exclusion. As of the OBBBA’s enactment, the following states do not conform, meaning excluded federal gain remains fully taxable at the state level: Alabama, California, Mississippi, Pennsylvania, and (previously) New Jersey (which enacted conformity effective January 1, 2026). Hawaii and Massachusetts offer only partial conformity. Clients in high-tax non-conforming states (notably California, which imposes a ~13.3% top rate) will experience a substantially reduced net benefit. Always verify your state’s current treatment of QSBS in your analysis.

B.  No Retroactive Conversion of Pre-OBBBA QSBS

The OBBBA changes apply only to stock issued after July 4, 2025. Exchanges of pre-OBBBA QSBS (e.g., in Section 351 transfers, tax-free reorganizations, or Section 1045 rollovers) will generally not convert old stock into new QSBS — holding period carryover rules preserve the original acquisition date. Clients should not attempt to “refresh” pre-OBBBA stock.

C.  Qualified Business Requirement

The active business requirement and excluded industry rules under Section 1202(e) remain unchanged. Businesses in financial services, professional services (law, accounting, consulting, health), hospitality, athletics, and similar fields do not qualify. This remains a threshold issue requiring early diligence.

D.  Documentation and Recordkeeping

You should ensure the company establishes and maintains the following documentation contemporaneously:

• Gross asset certifications from the corporation at each issuance date.
• Original issuance confirmation and capitalization table records.
• Business activity analysis confirming qualifying trade or business status.
• Segregation of pre- and post-OBBBA stock by certificate or book-entry to facilitate sequential sale strategies.

E.  Impact on Entity Structure Decisions

The OBBBA’s enhancements may influence entity form decisions. The possibility of partial exclusion after only 3 years — and the higher gross asset threshold — make C corporation status more attractive for growth-stage companies that were previously considering pass-through structures. Conversion to C corporation status should be analyzed carefully, including the impact on the gross asset test (contributions of appreciated property are tested at fair market value).

VII. Client Action Items to Consider

1. Review existing QSBS holdings to determine whether stock is pre- or post-OBBBA and model potential exclusion amounts under both regimes.
2. For clients with stock near the 3- or 4-year mark, analyze the cost-benefit of early exit versus waiting, accounting for investment appreciation risk and state tax exposure.
3. For companies nearing the gross asset threshold, evaluate timing of new equity issuances to ensure stock is issued before the $75 million limit is exceeded.
4. Assess entity structure for clients operating as partnerships or S corporations who may benefit from C corporation conversion.
5. Establish segregated recordkeeping for pre- and post-OBBBA stock from the same issuer to preserve sequential sale opportunities.
6. For high-net-worth founders, evaluate trust-based stacking strategies in conjunction with state residency and domicile planning.
7. Monitor IRS guidance on OBBBA implementation, particularly regarding carryover holding period rules and rollover provisions.

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