The $75M QSBS Expansion: Strategic Implications for Growth-Stage Startups

Qualified Small Business Stock, or QSBS, is a tax benefit that allows founders, employees and investors to exclude a significant portion (if not all) of their capital gains from federal tax when stock is sold in a qualifying startup. It’s a significant competitive advantage for qualifying startups because QSBS can substantially reduce capital gains tax for stakeholders upon exit, helping startups attract and retain talent and investors.

As of July 4, 2025, QSBS has become significantly more attractive for growth-stage startups, thanks to the passage of the One Big Beautiful Bill Act (OBBA), which expanded the gross asset threshold from $50 million to $75 million for any shares issued after this date. Essentially, the OBBA creates two QSBS regimes:

• Pre-July 4, 2025, startups are subject to a $50 million gross asset limit and the exclusion is capped at $10 million for issued QSBS.
• Post-July 4, 2025, startups are subject to a $75 million gross asset limit and the exclusion is capped at $15 million for issued QSBS.

Essentially, this means that if your startup was previously over the $50 million gross asset limit and ineligible to issue new QSBS stock, it can now issue QSBS-eligible stock again to employees and investors if it remains under the $75 million threshold. In addition to the higher threshold ($75 million), there’s also a higher exclusion cap ($15 million) and flexible holding periods of three, four and five years, a trio of advantages that startups and their investors can take advantage of.

Understanding the Three Major QSBS Changes

The OBBBA introduced a trio of favorable changes to QSBS rules under Section 1202 of the tax code, applicable to QSBS acquired post-July 4, 2025. They are:

• Higher gross asset threshold from $50 million to $75 million at the time the stock is issued.
• An increased per-issuer gain exclusion cap from $10 million to $15 million.
• New tiered holding periods and exclusion tiers for three (50 percent exclusion), four (75 percent exclusion) and five years (100 percent exclusion) or more.

Why the $75 Million Threshold Matters for Growth-Stage Companies

Any startup should strive to grow. The higher aggregate gross assets limit makes it easier for startups to grow and offer QSBS benefits for a longer period. For instance, a startup with $45 million in assets that raises $25 million in Series A or Series B fundraising will now maintain QSBS eligibility because it remains under the $75 million threshold. Previously, it would have been ineligible because it exceeded the $50 million threshold.

Aggregate gross assets are defined as your startup’s cash and the adjusted tax basis of all the other property it holds. This balance sheet value is tested following each issuance of equity and must be monitored closely to align with evolving tax rules and preserve QSBS-related tax benefits.

Tiered Holding Periods Enable Earlier Liquidity

The introduction of tiered holding periods also facilitates more effective time exit strategies. Previously, shareholders would have to wait up to five years to qualify for benefits. Now, they can exit after three and four years, with 50 percent and 75 percent exclusions, respectively. Non-excluded gains are taxed at 28 percent compared to the standard 20 percent, and when combined with QSBS-based tax advantages, this structure can lead to substantial tax savings while still rewarding long-term holders who stay over a decade invested in the business.

Strategic Planning to Maintain QSBS Eligibility

Despite changes via the OBBBA, startups must still work to preserve QSBS status across funding rounds and growth milestones. For instance, quarterly asset monitoring through 409A valuations can help startups track proximity to the $75 million threshold. The OBBBA also allows for immediate R&D expensing, which startups can utilize to their advantage, keeping gross assets below the threshold and preserving QSBS tax benefits.

Timing equity issuance, SAFE conversions and asset acquisitions are also key to maintaining QSBS eligibility.

Timing Equity Issuances Around the Threshold

Timing is everything when it comes to equity issuance around the threshold. Some timing strategies include:

• Accelerating option grants before any acquisitions or purchases that push your startup over $75 million. This is especially important for startups in the $65 to $70 million gross asset value range.
• Know that the conversion date and not the original issuance date of SAFE notes and convertible notes determines QSBS eligibility.
• Always ensure you’re keeping proper documentation, including records of issuance dates, valuations and information on asset levels.

Preserving Benefits Through M&A Transactions

It’s also key to structure QSBS attributes through exits. For instance, Section 1202(h) rollover states that stock-for-stock acquisitions can preserve QSBS holding periods and benefits.

You can also implement a partial rollover strategy, where a portion of QSBS stock is exchanged for new stock, deferring taxes and preserving benefits. It’s often done to retain QSBS eligibility for the rolled-over portion, while receiving cash for the remainder. For instance, 60-70 percent cash upfront and a 30-40 percent stock rollover preserve benefits on the rolled-over portion.

Section 1045 allows investors to defer capital gains from selling QSBS by reinvesting the proceeds into new QSBS within 60 days of the sale. To qualify, any original stock must have been held for at least six months, replacement stock must be new QSBS purchased within the 60-day window and taxpayers must make an election on their tax return. Section 1045 rollover is a means of deferring taxes on gains when the five-year holding period has not been met or when gains exceed the exclusion cap.

Industry-Specific Implications

The $75 million gross asset expansion creates disproportionate value for capital-intensive industries through economies of scale, high operating leverage and significant barriers to entry for competitors. For instance, SaaS startups that are light on assets rarely hit the $50 million threshold, but HealthTech and eComm startups were often quickly disqualified under the previous rules. Different industries with varying business models approach the calculation of gross assets in different ways.

HealthTech and MSO/PC Models

HealthTech and MSO/PC business models typically involve greater asset intensity. For instance, medical equipment purchases are often a necessity, costing up to several million dollars per location. Property and working capital can easily eclipse the $50 million threshold for startups with multiple locations.

The new $75 million threshold enables greater practice acquisitions while maintaining eligibility in the healthcare startup sector.

eComm and CPG Inventory Considerations

Startups that are working capital-intensive, such as eComm and CPG startups, also benefit from the new QSBS regulations. All inventory (i.e., warehouse, in transit, FBA) counts toward aggregate gross assets at balance sheet value. The new $75 million threshold enables direct-to-consumer startups to scale more comfortably under the new regulations compared to the previous ones.

AI and Biotech R&D Advantages

Prior to July 4, 2025, Section 174 capitalization requirements impacted balance sheets, prompting AI and biotech startups to reach the $50 million threshold despite having limited tangible assets. The new R&D expensing rules expand the eligibility runway by several years for startups that spend $15 million annually. This helps reduce gross assets and remain QSBS eligible for longer.

Critical Compliance Requirements

Even with expanded benefits to help startups maintain QSBS eligibility for longer, there are still disqualifiers that they should avoid. Even a single, minor mistake can result in the forfeiture of several million dollars per taxpayer in federal savings. Mistakes are most commonly made in documentation, in meeting active business requirements, and in qualified trade or business requirements.

Documentation and Recordkeeping Essentials

Robust record-keeping is essential to ensure compliance. Key documents include stock certificates, board resolutions, 409A valuations and C-Corp verification, the latter of which must be dated and created at the time of the transaction.

If documentation is missing or created retroactively, the IRS can disallow exclusions.

It’s often beneficial for startups to work with a tax professional or a Fractional CFO to ensure all requirements are met.

Active Business and Qualified Trade Requirements

To qualify for QSBS benefits, startups must pass the active business test, which means that at least 80 percent of their assets are used in the active conduct of a qualified trade or business during the taxpayer’s holding period. Active business includes R&D, manufacturing, inventory and operating equipment count. Passive investments and excess cash don’t count toward active business.

It’s best practice to use fundraising proceeds for active business within 12-18 months to maintain the 80 percent threshold. It’s also worth noting that excluded industries include hospitality, farming, financial services, professional services and banking.

Partner With QSBS Specialists

Navigate QSBS complexity with startup tax experts. At Graphite Financial, we specialize in working with startups in the SaaS, eComm, HealthTech, Fintech and AI sectors to ensure QSBS optimization. We’ll coordinate bookkeeping, financial timing and verify compliance, while guiding founders through fundraising rounds or exit strategies. Contact us today to learn more and schedule a consultation.

Frequently Asked Questions About the $75M QSBS Expansion

Does the $75 million QSBS threshold apply retroactively to stock issued before July 4, 2025?

No, the new $75 QSBS threshold does not apply retroactively to stock issued before the One Big Beautiful Bill Act was signed into law. Stock that was acquired on or before July 4, 2025, is subject to the previous $50 million gross asset limit. The new $75 million threshold only applies to QSBS that’s issued or acquired after July 4, 2025.

Can startups that previously exceeded the $50 million threshold now issue new QSBS under the $75 million limit?

Yes, if your startup previously exceeded the $50 million threshold, you can now issue new QSBS under the new $75 million limit, provided that your startup’s gross assets have not exceeded $75 million. Thanks to the change in gross asset limit, startups previously ineligible are now eligible to issue QSBS if they meet the gross asset requirement.

How does the tiered holding period (3/4/5 years) apply to stock issued before the OBBBA’s effective date?

The tiered holding period introduced by the One Big Beautiful Bill Act doesn’t apply to any stock issued before the active date (July 4, 2025). Any stock that was acquired before July 4, 2025, remains subject to the previous rules and regulations, which include a five-year holding period for any gain exclusion.

What happens to QSBS benefits if my startup exceeds $75 million in assets after I receive shares?

If your startup exceeds the $75 million asset threshold after you receive your shares, you won’t lose QSBS benefits for any shares that you already hold, so long as the startup meets the asset requirement at the time of issuance and immediately after issuance. However, any shares issued after your startup exceeded the limit would not qualify for QSBS.

How do state income taxes affect QSBS benefits in non-conforming states like California and New Jersey?

Several states do not conform to QSBS exclusion, meaning that gains from QSBS sales will be excluded for federal purposes, but will be considered taxable income at the state level. California is one such state where capital gains are taxed as ordinary income, with marginal personal income tax rates reaching as high as 13.3 percent. Currently, New Jersey does not conform to the federal QSBS exclusion; however, it will align with the federal QSBS exclusion for dispositions in tax years starting on or after January 1, 2026.

How should companies monitor aggregate gross assets to ensure continued QSBS eligibility through multiple funding rounds?

Gross assets should be monitored through real-time tracking of tax-basis balance sheets, especially before and after each funding round. Keep in mind that QSBS eligibility is based on the adjusted tax basis of assets, not fair market value. Eligibility should be diligently tracked and fundraising rounds should be planned accordingly.