Major QSBS Changes: $15M Exclusion and New Tiered Benefits Under the One Big Beautiful Bill

Quick Overview

The recently passed One Big Beautiful Bill (OBBB) has dramatically enhanced Qualified Small Business Stock (QSBS) benefits for entrepreneurs and investors. Starting July 4, 2025, the exclusion amount increases from $10 million to $15 million per stockholder, and a new tiered system allows partial benefits as early as year three. Additionally, the gross asset threshold increases from $50 million to $75 million, expanding QSBS eligibility to larger companies. However, these enhanced benefits only apply to stock issued on or after July 4, 2025—any stock issued before this date remains subject to the original rules. This article explains the new rules, their implications for founders and investors, and strategies to maximize these expanded benefits.

The Major Changes at a Glance

The One Big Beautiful Bill (OBBB) introduces significant improvements to Section 1202 QSBS benefits:

Increased Exclusion Amount

• New limit: $15 million per stockholder (up from $10 million)

• Applies to: Stock issued on or after July 4, 2025

• 10x basis rule: Still applies—exclusion is the greater of $15 million or 10x your basis

• Inflation adjustment: Beginning after 2026, the $15 million threshold will be indexed for inflation

New Tiered Holding Periods

Instead of the all-or-nothing five-year requirement, the new rules introduce graduated benefits:

• Year 3: 50% exclusion of gains (estimated $119,000 tax savings per $1 million of gain)

• Year 4: 75% exclusion of gains (estimated $178,500 tax savings per $1 million of gain)

• Year 5+: 100% exclusion of gains (estimated $238,000 tax savings per $1 million of gain)

Increased Gross Asset Threshold

• New limit: $75 million (up from $50 million)

• Inflation adjustment: Beginning after 2026, indexed for inflation

• Impact: Allows larger companies to issue QSBS-eligible stock

Grandfathering of Existing Stock

• Pre-July 4, 2025 stock: Remains subject to original rules ($10 million cap, $50 million gross asset limit, five-year holding period)

• Post-July 4, 2025 stock: Eligible for all enhanced benefits

Understanding the New Tiered System

The new tiered approach represents a fundamental shift in how QSBS benefits work, making them more accessible and valuable for shorter-term holdings.

How the Tiers Work in Practice

Let's say you acquire qualifying stock on August 1, 2025, with a basis of $100,000, and sell it for $5 million:

If sold in Year 3 (August 2028)

• Gain: $4.9 million

• Exclusion: 50% of $4.9 million = $2.45 million excluded

• Taxable gain: $2.45 million (taxed at 28% rate, not subject to AMT)

If sold in Year 4 (August 2029)

• Gain: $4.9 million (assuming no additional appreciation)

• Exclusion: 75% of $4.9 million = $3.675 million excluded

• Taxable gain: $1.225 million (taxed at 28% rate, not subject to AMT)

If sold in Year 5+ (August 2030 or later)

• Gain: $4.9 million

• Exclusion: 100% of $4.9 million = fully excluded

• Taxable gain: $0

This tiered approach provides meaningful tax benefits even for companies with shorter exit timelines, addressing one of the biggest limitations of the previous QSBS structure. Importantly, the portion of gains not eligible for exclusion under the 50% or 75% tiers is taxed at a 28% rate but is not treated as a preference item for alternative minimum tax purposes.

Impact on QSBS Stacking Strategies

The enhanced benefits significantly amplify the potential of QSBS stacking strategies:

Increased Stacking Potential

With the exclusion amount increasing to $15 million per taxpayer:

• Individual exclusion: Up to $15 million

• SLANT for spouse: Up to $15 million

• Trust for each child: Up to $15 million each

• Additional family trusts: Up to $15 million each

A founder with a spouse and three children could potentially stack exclusions totaling $75 million (5 × $15 million) through proper trust planning.

Earlier Access to Benefits

The tiered system means:

• Trusts can begin claiming partial benefits in year three

• Earlier liquidity events become more tax-advantaged

• Reduced pressure to hold for the full five years

Strategic Timing Considerations

Founders now face more complex timing decisions:

• Whether to sell in year 3, 4, or 5+ depends on the specific gain amount

• The value of waiting an additional year must be weighed against market conditions

• QSBS stacking strategies may need adjustment based on anticipated exit timing

Grandfathering Rules: Old vs. New Stock

The legislation includes specific grandfathering provisions that create a two-tier system:

Stock Issued Before July 4, 2025

• Subject to original QSBS rules

• $10 million exclusion cap (or 10x basis)

• $50 million gross asset threshold

• Five-year holding period required for any benefits

• No partial exclusion for shorter holding periods

Stock Issued On or After July 4, 2025

• Eligible for enhanced benefits

• $15 million exclusion cap (or 10x basis) with inflation adjustments after 2026

• $75 million gross asset threshold with inflation adjustments after 2026

• Tiered exclusion system (50% at 3 years, 75% at 4 years, 100% at 5+ years)

Mixed Holdings Scenarios and Strategic Considerations

Many founders and employees will have stock issued both before and after the July 4, 2025 cutoff date:

• Each tranche of stock follows the rules in effect when it was issued

• Careful record-keeping becomes critical for tracking different benefit levels

• Tax planning must account for the different treatment of each holding

IImportant Consideration: For taxpayers with both pre- and post-July 4, 2025 stock, the interaction between the two exclusion caps remains unclear. Conservative guidance suggests that the total exclusion may still be capped at the higher amount rather than allowing a combined $25 million exclusion. We are continuing to investigate how these provisions will interact and recommend consulting with tax professionals as additional guidance becomes available.

Limitations on Converting Old Stock to New Benefits

The legislation includes specific provisions in Section 1223 designed to restrict conversion of pre-July 4, 2025 QSBS into post-July 4, 2025 QSBS to access the enhanced benefits. However, the exact scope and application of these restrictions remains unclear. While some transactions like preferred-to-common conversions may potentially qualify as exceptions, the specific rules and their interpretation are still being analyzed. Business owners should consult with tax professionals before attempting any restructuring intended to access the enhanced QSBS benefits.

State Tax Implications

Most states that currently conform to federal QSBS treatment are expected to recognize the enhanced benefits:

Conforming States

States like New York, Nevada, and others that follow federal QSBS rules will likely:

• Recognize the increased $15 million exclusion

• Allow the tiered exclusion percentages

• Apply the same grandfathering rules

Non-Conforming States

The five states that don't conform to federal QSBS (California, New Jersey, Alabama, Mississippi, Pennsylvania) will continue to:

• Tax the full gain regardless of federal exclusion

• Not recognize either the old or new QSBS benefits

• Make trust-based planning in favorable jurisdictions even more valuable

The Expanded Gross Asset Threshold: $75 Million

One of the most significant but under-discussed changes in OBBB is the increase in the gross asset threshold from $50 million to $75 million for stock issued after July 4, 2025.

Impact of the Higher Threshold

This change significantly expands QSBS eligibility:

• Larger companies can now qualify: Companies with up to $75 million in gross assets can issue QSBS

• Later-stage funding rounds: Series B and C companies that previously couldn't issue QSBS may now qualify

• M&A opportunities: Larger transactions can now include QSBS-eligible equity rollovers for target shareholders

Addressing Inflation

While the increase to $75 million is welcome, it only partially addresses inflation since 1993. Based on Consumer Price Index data, the original $50 million threshold from 1993 would be equivalent to approximately $112.7 million in 2025 dollars. The new threshold, while improved, still doesn't fully account for 32 years of inflation.

Additional Impact from OBBB Tax Provisions

The OBBB also includes full expensing provisions for business properties and domestic research and experimental expenditures, which will reduce many corporations' calculated gross assets, making it easier for companies to stay under the threshold.

Real-World Example

A company converts from an LLC to a Delaware C-Corporation on August 31, 2026, with assets that had a fair market value of $30 million. In December 2026, investors purchase $55 million of preferred stock.

Under the new rules, would qualify for QSBS benefits since it's under the $75 million threshold. Under the old rules, this same investment would have exceeded the $50 million limit and been ineligible for QSBS treatment.

Strategic Implications for Different Scenarios

For Early-Stage Companies

Companies in seed or Series A stages should consider:

• Timing of stock issuance: Consider postponing stock issuance until after July 4, 2025, to benefit from enhanced rules

• Implementing new QSBS-qualified equity programs post-July 4th

• Educating team members about the enhanced benefits

• Planning trust structures to maximize the $15 million exclusions

• Taking advantage of the higher $75 million gross asset threshold for larger funding rounds

• A strategy we're considering: doing a 10:1 stock split and reissuing stock to all stockholders to be eligible for the new benefits

For Growth-Stage Companies

Companies approaching potential exits should evaluate:

• Whether to accelerate or delay exit timing based on the tiered benefits

• The value of partial exclusions versus waiting for full benefits (though the five-year mark still provides maximum benefit)

• How the enhanced benefits affect acquisition negotiations

• Trust planning for key stakeholders with significant equity

• Consulting with tax professionals about permissible restructuring strategies given the new conversion restrictions

For Investors

Angel investors and VCs should consider:

• The enhanced attractiveness of QSBS-eligible investments

• How the tiered benefits affect investment and exit strategies

• Opportunities to maximize benefits through stacking strategies

• The importance of stock issuance date for benefit eligibility

• The expanded universe of companies that can issue QSBS due to the higher gross asset threshold

Implementation Timeline and Action Items

Immediate Actions (Through July 4, 2025)

• Finalize any planned stock issuances under current rules if beneficial

• Prepare for enhanced benefit planning post-July 4th

• Educate stakeholders about the upcoming changes

• Review existing cap tables and equity plans

Post-July 4, 2025 Planning

• Implement new equity issuance strategies

• Establish trust structures to maximize $15 million exclusions

• Update equity documentation to reflect new benefit structures

• Coordinate with tax advisors on implementation

Ongoing Considerations

• Track different tranches of stock and their applicable rules

• Monitor state conformity developments

• Adapt exit timing strategies based on tiered benefits

• Maintain detailed records for compliance

Real-World Example: Maximizing the New Benefits

A founder launching a new company in August 2025 could implement this strategy:

• Retain 40% of equity personally

• Establish a SLANT for spouse with 20% of equity

• Create individual trusts for three children, each holding 13.3% of equity

If the company exits for $100 million in 2029 (year 4), this structure could provide:

• Personal exclusion: 75% of $40M = $30M excluded (capped at $15M exclusion)

• SLANT exclusion: 75% of $20M = $15M excluded

• Each child's trust: 75% of $13.3M = ~$10M excluded per trust

Total potential exclusions: $15M + $15M + $10M + $10M + $10M = $60M excluded from a $100M exit, dramatically reducing the family's tax burden compared to the previous system.

Potential Challenges and Considerations

Complexity of Mixed Holdings

• Tracking multiple acquisition dates and applicable rules

• Complex record-keeping requirements

• Potential confusion in exit planning

Valuation and Documentation

• Increased importance of contemporaneous valuations

• Need for detailed acquisition date documentation

• Enhanced audit risk given larger exclusion amounts

State Conformity Uncertainty

• Not all states may immediately conform to new rules

• Potential legislative delays in some jurisdictions

• Ongoing monitoring required

Key Takeaways

• QSBS exclusion increases to $15 million for stock issued on or after July 4, 2025 (with inflation adjustments after 2026)

• New tiered system provides partial benefits starting in year three (50%, 75%, 100%)

• Gross asset threshold increases from $50 million to $75 million (with inflation adjustments after 2026)

• Stock issued before July 4, 2025, remains subject to original $10 million and five-year rules

• Enhanced benefits significantly increase the value of QSBS stacking strategies

• Most conforming states expected to recognize the new federal benefits

• Consider selling pre-July 4, 2025 stock first to potentially maximize total exclusion capacity, though the interaction between exclusion caps remains under investigation

• The changes make QSBS benefits more accessible for shorter-term exits and larger companies

• Strategic timing of stock issuance and exits becomes more complex but potentially more rewarding

• Business owners should consider postponing stock issuance until after July 4, 2025, when there are valid business reasons to do so

Disclaimer

Tax laws are complex and constantly evolving. While this article provides general information about recent QSBS changes, it should not be considered legal or tax advice. The implementation of these new rules may involve additional regulatory guidance. Each situation is unique, and tax treatment can vary based on individual circumstances. Always consult with qualified tax and legal professionals before making decisions based on the information provided here.

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