The New QSBS Playbook: How to Thrive Post-OBBBA

Qualified Small Business Stock (QSBS) has been one of the most powerful tax incentives for founders and investors in the past decade—permanently eliminating up to $10 million of gain per eligible taxpayer. Now, the One Big Beautiful Bill Act (OBBBA) doesn’t merely tweak QSBS; it widens the funnel so that more companies qualify, and more gain can be excluded. It does so by ushering in faster access to partial exclusions, while raising the per-issuer cap and increasing the “gross asset” threshold for eligibility.

But founders, investors, and employees looking to make the most of QSBS will also face a host of new decisions—adding complexity. Major changes will impact entity choice, capitalization, equity compensation, and exit strategies, just to name a few. Here are some essential tips on navigating the post-OBBBA landscape and optimizing your QSBS value under Section 1202.

Headline Changes to QSBS

The following changes apply to stock issued after July 4, 2025 (the “applicable date”):

• Corporate Asset Limitation: Raised from $50 million to $75 million, with inflation adjustments.
• Per-Issuer Limitation: Increased from $10 million to $15 million, or 10 times the taxpayer’s cost basis.
• Graduated Holding Period: Allows 50% exclusion after 3 years, 75% after 4 years, and 100% after 5 years.
• Alternative Minimum Tax (AMT) Exception: Gains under the new exclusion tiers are not AMT tax preference items.
• Inflation Indexing: Adjusts the asset cap and $15 million gain exclusion limit annually for inflation.

Shares acquired on or before July 4, 2025, retain the $10 million per-issuer limitation, and pre-OBBBA shares cannot be exchanged for post-OBBBA shares. Only newly issued stock post-OBBBA qualifies for expanded benefits. Importantly, the eligibility requirements remain unchanged (Display 1).

 

Mixed-Vintage Shares

If you’re holding stock acquired on or before July 4, 2025—along with shares acquired after this date—the timing of your sales could make a big difference. That’s because the OBBBA changed the game by setting new caps on the “applicable dollar limit” for QSBS acquired after its enactment. For stock acquired after July 4, 2025, the cap is $15 million, while for stock acquired on or before this date, it’s $10 million. But here’s the twist: these limits are reduced by any eligible gain you’ve recognized in previous years^.[1]

Now, if you sell both pre- and post-applicable date stock in the same year, the eligible gain from your older stock is applied first. This could potentially shrink your $15 million cap for newer stock down to $5 million. So, the order in which you sell your shares matters more than ever (Display 2).

 

Getting the order right is even more important when the post-applicable date stock is held for between three and five years, where 50% or 75% gain exclusions apply. To maximize benefits, sell QSBS with partial exclusions last. Remember, the per-issuer limit is reduced by the eligible limit, not just the 50% or 75% excluded gain percentage (Display 3).

 

Additionally, the portion of QSBS gain not excluded—50% for stock held three years and 25% for four years—is taxed at the QSBS gain rate of 28%. When you add the 3.8% net investment income tax, the effective rate jumps to 31.8% (Display 4).

 

For mixed pre- and post-applicable date stock with varying holding periods, the optimal sale order is:

1. Sell pre-applicable date shares first, up to $10 million.
2. Sell post-applicable date stock held for at least five years next.
3. Sell post-applicable date stock held for four years next.
4. Sell post-applicable date stock held for three years last.

Fresh QSBS Windows

Corporations that once exceeded the $50 million asset limit but now fall below the $75 million cap have a new chance to issue QSBS until they reach the updated, inflation-indexed limit. This change offers a strategic chance to attract investors and employees, boosting growth.

The OBBBA includes provisions that help reduce a corporation’s gross assets, keeping them under the inflation-adjusted $75 million cap and extending their ability to issue QSBS. A crucial provision for research-focused companies is the immediate expensing of domestic research costs under Section 174(a), which means these costs don’t appear as amortized “assets” on the company’s balance sheet.^[2]

What’s more, small businesses with average annual gross receipts of $31 million or less can retroactively apply full expensing for tax years 2022–2024 by amending returns for each year by July 4, 2026. This may reduce past asset levels below $50 million, possibly qualifying earlier stock grants for QSBS. Companies can also choose to accelerate domestic research and experimental expenses capitalized from 2022 to 2024, deducting them in one or two years. Combined with 100% bonus depreciation, immediate expensing should help many corporations stay below the asset limit and issue QSBS for longer.

Revisiting Entity Choice

While the OBBBA enhances the appeal of QSBS, founders and investors must weigh future QSBS benefits against immediate tax savings from pass-through entities like LLCs or S corporations. C corporations face double taxation, with a combined federal rate of about 39.8%,^[3] while S corporation or LLC income is taxed once at the owner’s rate, which can be as high as 40.8%. However, those who materially participate in the business can avoid the 3.8% net investment income tax, and together with the 20% deduction on qualified business income under Section 199A, can lower their effective tax rate to around 30% in many cases.

Because startups don’t tend to distribute profits early on, C corporation double taxation is less of an issue. Ideally, QSBS allows earnings to be taxed at 21% and excludes up to 100% of the gain upon sale, averting double taxation, assuming no dividends were paid.^[4] But QSBS benefits require a stock sale, while buyers often prefer asset purchases. Whether tax changes and Section 1202 favor C corporation status depends on a company’s circumstances, growth, and exit strategy. Ultimately, founders should conduct a personalized analysis before deciding on an entity form.

State Tax Considerations

Federal QSBS benefits don’t always extend to state taxes. Some states may take months to update their revenue laws to match federal changes from the OBBBA. Additionally, several states don’t align with federal law regarding Section 1202, meaning state-level capital gains taxes may still apply. The states that generally do not conform include:

• California
• Pennsylvania
• Alabama
• Mississippi
• New Jersey (will conform after December 31, 2025)
• Massachusetts (partial conformity)
• Hawaii (partial conformity)

Strategic Moves for QSBS Success

The OBBBA has dramatically transformed the QSBS landscape, offering compelling opportunities alongside new challenges. For founders and investors, strategic planning takes on a newfound urgency. It’s about finding the right balance between immediate tax benefits and the potential for long-term QSBS gains. Key strategies include leveraging immediate expensing and bonus depreciation to manage asset levels, strategically timing capital raises to stay within the inflation-adjusted asset cap and optimizing the sale order of mixed-vintage shares. Selling up to—but not over—the per-issuer limit may allow shareholders to benefit from annual inflation adjustments, capturing more QSBS exclusions over time. Understanding state tax conformity and undertaking a custom analysis for entity choice can also help maximize QSBS benefits.

In this new era of QSBS planning, informed decision-making and proactive management can unlock transformative tax savings, fueling growth and success for startups and investors alike. By embracing the opportunities and adeptly navigating the complexities introduced by the OBBBA, investors and founders can fully capitalize on QSBS’s powerful potential.