What is QSBS?

Qualified Small Business Stock, or QSBS, is a type of stock designed to drive investment and the founding of small businesses in the U.S. It also comes with some significant tax benefits, notably the ability to exclude some or all capital gains tax on the sale of stock so long as it’s held for a certain period.

Defined by Section 1202 of the Internal Revenue Code, this exemption encourages initial investment in emerging startups by offering tax-free gains for founders and a startup’s early investors. Essentially, both founders and their employees can receive tax-free gains on their stock, providing a path for entrepreneurs and investors to build wealth by selling their stake in a successful or rising startup.

To qualify, a startup must have gross assets under a certain amount, be an active C-corporation and operate in an eligible industry.

The One Big Beautiful Bill Act (OBBA) significantly changed QSBS acquired after July 4, 2025, making the tax benefits even better for qualifying investments. Specifically, any QSBS acquired after this date can benefit from a 100% gain exclusion over five years (and tiered exclusions in lesser years), an increased gain exclusion cap to $15 million and a higher corporate-level gross asset threshold of $75 million (up from $50 million).

For instance, selling startup stock could result in zero federal capital gains tax if the stock qualifies for QSBS under updated regulations, representing a significant tax savings and reinvestment into the startup.

Understanding QSBS Requirements and Eligibility Under the One Big Beautiful Bill Act

Qualifications for QSBS under the OBBBA must meet three categories of requirements:

• Corporation status
• Stock acquisition
• Business type

Here’s a closer look at key changes under the OBBBA and how they can impact your startup’s taxes. Startups looking to leverage small business stock QSBS should pay particular attention to these requirements to maximize potential tax savings.

Corporation and Business Requirements Post-OBBBA

One key qualification for QSBS is your startup’s entity status. It must be a domestic corporation (C-Corp). S-corps and LLCs do not qualify.

The OBBBA also increased the threshold to $75 million for any shares issued after July 4, 2025, from $50 million. Beginning in 2027, this number will be adjusted annually for inflation.

The 80 percent active business test remains a core requirement for a C-corp’s stock to qualify as a QSBS under Section 1202 of the U.S. tax code.

Stock Acquisition and Shareholder Rules

Even with changes made under the OBBBA, the original QSBS issuance requirement remains: shareholders must acquire stock directly from the issuing startup in exchange for money, property or services. They cannot acquire stock from another shareholder, as this will void the original issuance requirement and impact accounting.

Again, only stock acquired after July 4, 2025, qualifies for the enhanced OBBBA benefits.

Revolutionary QSBS Tax Benefits Under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act was a nearly 900-page piece of legislation signed into law on July 4, 2025. Among its effects on federal taxes, credits and deductions were revolutionary QSBS tax benefits that startups and founders can take advantage of. More specifically, the per-issuer cap was increased from $10 million to $15 million and R&D expensing was reinstated on QSBS qualifications.

The New Tiered Tax Exclusion Structure

One of the biggest changes under the OBBBA is the phased holding period tax exclusion benefits for QSBS shares issued after July 4, 2025. The benefits are as follows:

• 100 percent at 5 years held
• 75 percent exclusion at 4 years held
• 50 percent exclusion at 3 years held

Pre-OBBBA, QSBS shares still required a five-year hold for 100 percent exclusion. However, the OBBBA now offers a tiered tax exclusion structure for three and four years, offering greater flexibility.

The new $15 million cap applies only to new issuances.

Calculating Your Enhanced QSBS Tax Savings

So how can you calculate your enhanced QSBS tax savings? Here’s a step-by-step process:

1. First, determine any gain from selling the stock.
2. Apply the tiered exclusion percentage based on the holding period and the issuance date. Remember, this applies to stock issued after July 4, 2025. There is a 50% exclusion for holding periods of three years, 75% for four years, and 100% for five or more years. If the stock was issued prior to July 4, 2025, the exclusion percentage depends on the specific date the stock was issued.
3. Calculate the maximum excludable gain. This is based on a $15 million cap post-OBBBA and a $10 million cap pre-OBBBA. The excludable gain is the lesser of the total gain multiplied by the applicable exclusion percentage or the gain limit. The gain limit is the greater of $15 million or 10 times the adjusted basis of the stock.
4. Determine the taxable portion of the gain. This is found by subtracting the excludable gain from your total gain. The remaining amount may be subject to federal income tax if it does not qualify for the QSBS exclusion.
5. Calculate tax savings. The tax savings is found by multiplying the taxable portion of the gain by the applicable capital gains rate. The final tax savings is the amount of tax that you avoid.

After determining the taxable portion of the gain, it’s important to consider other tax obligations. Even if QSBS exclusions reduce your federal income tax, certain gains may still be subject to the alternative minimum tax, depending on your overall tax situation.

State Tax Treatment and Section 1045 Rollover Strategies

States don’t automatically adopt the QSBS changes upon passage of the One Big Beautiful Bill Act. States can conform to the new rules based on their specific tax laws. This means the QSBS benefit can vary between states or not apply at all at the state level, depending on where your startup is based. Make sure you know the state tax treatment based on the state your startup operates in.

However, Section 1045 allows taxpayers to defer capital gains tax from the sale of QSBS by reinvesting the proceeds into replacement QSBS within 60 days of the initial sale. There are some qualifications that must be met for a Section 1045 rollover. These include:

• The original QSBS must have been held for more than six months.
• Sale proceeds (and not just the gain) must be reinvested into a replacement QSBS within 60 days.
• The replacement QSBS must be stock in a domestic C-corp that meets active business requirements for at least six months after the purchase.
• Taxpayer holding period from the original QSBS is tacked onto the holding period of the replacement QSBS.

When combined with the increased gain exclusion cap to $15 million, a Section 1045 rollover can be used to reinvest into replacement QSBS investments and unlock new exclusion caps for each startup. Essentially, it’s a strategy that can recycle capital into the startup ecosystem.

However, pre-OBBBA QSBS stock cannot be converted into more beneficial post-OBBBA stock through rollovers or other restructuring.

Strategic QSBS Planning in the Post-OBBBA Era

How can startups maximize benefits under the newly passed legislation? There are a few important points to remember:

• Timing is everything. Only new issuances receive the enhanced benefits, so it’s important to ensure that you qualify for them if you want to maximize your tax savings potential.
• Additionally, reinstated R&D expensing can help certain types of startups stay under the asset threshold. These reinstated R&D expensing rules allow startups to retroactively apply R&D expenses. This helps with QSBS qualifications by allowing startups to reduce their total gross assets and stay below the gross asset cap for QSBS eligibility.
• If your startup is approaching the pre-OBBBA threshold, you can take some steps to qualify for the enhanced benefits. Some strategies include properly managing all assets (not just revenue), strategic fundraising, embracing growth and market positioning, and paying greater attention to your startup’s overall tax strategy.

Structuring New Issuances for Maximum OBBBA Benefits

One of the most important things to note about post-OBBBA issuances is that startups with a valuation between $50 and $75 million can now issue new QSBS. However, startups need to comply with the new rules for shares issued after the effective July 4, 2025 date, underscoring the importance of proper documentation.

Startups should maintain a detailed paper trail for all QSBS stock, including purchase agreements, corporate resolutions and clean capitalization tables. This is essential to proving compliance while ensuring all requirements are met in the event of a future IRS audit.

Leveraging QSBS as a Competitive Advantage

For startup founders, the new QSBS regulations can be a competitive advantage in attracting investors and talent. For instance, the 3-year partial exclusion can serve as an attractive incentive for impatient investors and inspire them to take action. Startups can also more strategically structure equity offerings and communicate the tax advantages of investing more clearly.

Startups may also use QSBS to attract more talent, specifically when it comes to tiered vesting matching as a promise to new hires. Under the new regulations, tax-free gains can represent a key component of any employee’s long-term compensation compared to standard equity packages.

When communicated clearly to investors and to potential hires, QSBS and the revolutionary tax benefits thanks to the OBBBA can serve as a significant competitive advantage.

Critical QSBS Compliance Considerations Post-OBBBA

Navigating the dual QSBS regimes can be complicated. It’s important to have a firm understanding of the pre-July 4, 2025, and post-July 4, 2025, QSBS regulations and what they could mean to your startup. Properly documenting all paperwork related to stock issuance is also imperative in anticipation of more IRS scrutiny. Failure to do so could present challenges to your startup. If you’re struggling to understand QSBS, consider working with a professional accounting firm.

Maximize Your QSBS Benefits with Expert Guidance

If this all sounds complex, that’s because it is — and it can be a lot for startup founders to understand on their own and truly maximize their benefits. That’s where a trusted, professional financial partner like Graphite Financial can help. As a full-service financial services firm, we’re experts in all things finances, including understanding and helping you maximize your startup’s benefits with the OBBBA’s QSBS changes.

Contact Graphite today for more information on how we can partner with your startup to maximize your benefits. Schedule a free consultation to learn more about our suite of financial services, which range from tax compliance to fractional CFOs for your startup.

Frequently Asked Questions

Can my pre-July 4, 2025 QSBS stock qualify for the new $15M cap?

No, QSBS issued before July 4, 2025, doesn’t qualify for the $15 million cap. It remains subject to the previous rules. The updated provisions only apply to QSBS issued on or after July 4, 2025.

What happens if our startup was at $60M in assets — can we now issue QSBS?

No, your startup cannot issue new QSBS. It’s because your startup’s gross assets exceed the $50 million limit. However, any shares issued before your startup crossed the $50 million threshold remain unaffected.

How does the tiered holding period work for stock options granted after July 4, 2025?

After July 4, 2025, the tiered holding period for stock options applies to gains from QSBS (not standard employee stock options). QSBS acquired on or after this date is eligible for tiered federal capital gains exclusions based on how long it is held.

Can I convert my existing QSBS to benefit from the new rules?

No, you cannot convert existing QSBS to benefit from the new rules. However, if you sell existing QSBS, any proceeds can be reinvested in new QSBS via a section 1045 rollover, making it subject to the new, more favorable rules.

How do the reinstated R&D expensing rules help with QSBS qualification?

Reinstated R&D expensing rules allow startups to retroactively apply R&D expenses. This helps with QSBS qualifications by allowing startups to reduce their total gross assets and stay below the gross asset cap for QSBS eligibility.

Do states automatically adopt the OBBBA QSBS changes?

No, states don’t automatically adopt the QSBS changes upon passing the One Big Beautiful Bill Act. States can conform to the new rules based on their specific tax laws, meaning the QSBS benefit can vary between states or not apply at all at the state level.

What documentation do I need to prove my stock qualifies under the new rules?

Proving stock qualification is simple. All you’ll need is documentation related to the stock’s issuance, your startup’s financials and the holding period.

How does the inflation adjustment work for the $15M cap and $75M threshold?

QSBS issued after July 4, 2025, is indexed for inflation under the Chained Consumer Price Index based on the $15 million exclusion cap and $75 million gross asset threshold. Adjustments will begin in 2027 and will be rounded to the nearest $10,000.