At a Glance
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, makes several key updates to Qualified Small Business Stock (QSBS) of Certain C corporations that could open new opportunities for investors and family office clients. The Act introduces a tiered exclusion system that allows for partial tax exclusions sooner, raises the cap on excluded gains, expands the size of qualifying companies, and preserves the ability to defer gains through Section 1045 rollovers. While QSBS remains a niche area, these changes may make it more attractive for investors pursuing high-growth, short- to mid-term ventures.
Contents
- A New Tiered Exclusion System
- Increased Gain Exclusion Cap
- Expanded Eligibility for Issuing Companies
- Section 1045 Rollovers Remain a Valuable Tool
- How a Section 1045 Rollover Works
- Key Takeaways
- Looking Ahead
For investors and family office clients with an eye toward emerging ventures and early exits, the One Big Beautiful Bill Act (OBBBA) brings notable updates to the Qualified Small Business Stock (QSBS) rules. These changes make QSBS more flexible and potentially more rewarding—but also more complex. While this area won’t affect all business owners, individuals and private investors with high-growth, early-stage opportunities may find new reasons to explore how QSBS fits into their broader tax and investment strategy.
A New Tiered Exclusion System
One of the most significant changes under the OBBBA is the replacement of the traditional five-year “all-or-nothing” holding period with a new tiered exclusion system. This shift allows taxpayers to benefit from partial exclusions sooner:
- 50% exclusion if held for at least three years but less than four years
- 75% exclusion if held for at least four years but less than five years
- 100% exclusion if held for five years or more—consistent with prior law
However, the new flexibility comes with a tradeoff. The portion of the gain that isn’t excluded—such as the 50% taxable portion for a three-year holding period—is taxed at the higher 28% capital gains rate (instead of the standard 20%) plus the 3.8% net investment income tax (NIIT). This results in an effective federal rate of roughly 15.9% for a three-year holding period and 7.95% for a four-year holding period.
In short, investors now have more exit timing options, but those who sell before the five-year mark will need to weigh the higher tax cost against liquidity or reinvestment goals.
Increased Gain Exclusion Cap
The OBBBA also raises the ceiling on the amount of gain that can be excluded from QSBS sales. Taxpayers can now exclude the greater of $15 million or 10 times their basis in the stock—up from the prior $10 million limit. Beginning in 2027, the $15 million cap will also be indexed for inflation, providing a long-term benefit for investors who hold stock in high-value growth companies.
Expanded Eligibility for Issuing Companies
The new law broadens which companies can qualify as small businesses for QSBS purposes by increasing the gross asset limit from $50 million to $75 million for stock issued on or after July 5, 2025. A company must meet this threshold both before and immediately after the stock is issued. This expansion opens the door for more mid-sized, high-growth ventures to attract investors who can take advantage of QSBS benefits, particularly in sectors like technology, renewable energy, and biotech—industries that often scale quickly.
Section 1045 Rollovers Remain a Valuable Tool
The Section 1045 rollover provision—which allows taxpayers to defer gain on the sale of QSBS by reinvesting the proceeds into new QSBS within 60 days—remains unchanged under the OBBBA. This option can be especially powerful for investors who sell before meeting the full five-year holding requirement for the Section 1202 exclusion.
To qualify, the original stock must have been held for more than six months. The taxpayer then reinvests the proceeds into new QSBS and makes the election on their tax return. The deferred gain reduces the basis of the new stock, and the holding periods of both stocks are combined—helping the investor maintain progress toward the five-year exclusion threshold.
How a Section 1045 Rollover Works
The rollover process defers capital gains following these steps:
- Calculate the capital gain from the original QSBS sale.
- Reinvest the proceeds into new QSBS within 60 days to defer the entire gain.
- Reduce the tax basis of the new stock by the deferred amount, which will be recognized later upon the sale of the replacement stock.
- Combine the holding periods of both stocks to preserve the five-year requirement for a potential Section 1202 exclusion.
- Elect the rollover on the tax return for the year of the sale.
To qualify for a Section 1045 rollover, specific conditions must be met:
- Both the sold and replacement stock must be QSBS.
- The original QSBS must have been held for over six months.
- Replacement QSBS must be purchased within 60 days of the sale.
- The company issuing the replacement stock must meet the active business requirement for at least six months after issuance.
- The taxpayer must make the proper election on their tax return using Form 8949 and Schedule D.
- The deferral only applies to capital gains, not ordinary income.
This benefit is limited to non-corporate taxpayers, including individuals, trusts, and estates, and applies only to capital gains, not ordinary income.
Key Takeaways
The One Big Beautiful Bill Act’s updates to QSBS make this incentive more flexible and potentially more valuable for investors in high-growth small businesses. Key advantages include:
- Earlier opportunities for partial exclusions
- A higher cap on total gain exclusions
- Expanded eligibility for issuing companies
- Continued availability of Section 1045 rollovers for tax deferral
Looking Ahead
While QSBS remains a niche planning area, these changes could present meaningful opportunities for investors, family offices, and entrepreneurs planning new ventures with near- to mid-term exit horizons. Because the rules are complex and each investor’s situation is unique, you should discuss potential QSBS strategies with your tax advisor before making investment or timing decisions.
Kris Schroeher joined ARB in 2000 soon after graduating from college. He has been a Tax Manager with the firm since 2022. His career focus is in providing income tax planning, income tax compliance, and business advisory services to businesses, private clients, and family offices.
