For many founders, selling a business is the payoff for years (often decades) of work, but a large tax bill can quickly shrink what should be a transformative financial moment. One exception has long helped business owners keep more of what they built: the Qualified Small Business Stock (QSBS) Exemption.
Now there’s more good news. The One Big Beautiful Bill Act (OBBBA) has enhanced the QSBS in meaningful ways, expanding who can qualify and how much gain can be excluded from federal taxes. For business owners planning an exit or simply thinking ahead, these changes can make a multimillion-dollar difference.
Here’s what small business owners need to know.
What is the QSBS Exemption?
The QSBS Exemption allows qualifying owners to sell their small business without paying federal taxes on gains of up to $10 million when they sell their corporate stock, subject to certain IRS requirements. The OBBBA builds on this benefit, expanding both eligibility and the potential tax savings over time.
Who qualifies for QSBS?
Seller requirements
● Eligible shareholders: Eligible shareholders. Individuals, trusts, estates and pass-through entities can all qualify — essentially, any non-corporate shareholder.
● Holding period: While the QSBS Exemption currently allows 100% of federal capital gains tax (up to a maximum amount of $10 million or more) to be excluded after a holding period of at least five years, the OBBBA provides for partial exemptions with shorter holding periods and future increases to the maximum tax-free amount for owners who meet the full holding period requirements.
● Original issuance of stock: The stock must be acquired directly from the corporation, through purchase, compensation or gift/inheritance from the original stockholder.
What counts as a ‘small business’ for QSBS?
Company requirements
● Eligible corporation. The company must be a U.S. C corporation at the time of issuance (LLCs taxed as C corporations also qualify).
● Gross asset test. Historically capped at $50 million, the limit of a corporation’s gross assets now shifts to a two-tier system under the OBBBA:
○ If the stock was issued before July 5, 2025: $50 million.
○ If the stock was issued on or after July 5, 2025: $75 million.
This expansion means more businesses can qualify as “small” for QSBS purposes.
● No redemption transactions. Generally, the corporation must not have made any repurchases of stock (redemption) from any of its shareholders.
● Qualified trade or business. Most operating businesses qualify, but key exclusions include:
○ Personal service: where the principal asset is the reputation or skill of one or more of its employees.
○ Financial: banking, insurance, financing, leasing, investing or similar businesses.
○ Farming: including raising or harvesting trees.
○ Oil, gas, mining: drilling and related activities.
○ Hospitality: hotel, motel, restaurants and similar businesses.
○ Real estate: ownership of, dealing in, or rental of real property.
● Active business test. At least 80% of the company’s asset value must be used in active operations of a qualified trade or business.
New Benefits for New Businesses
The OBBBA modernizes QSBS in two significant ways.
1. Raises the cap on tax-free gain
The maximum gain exclusion has increased from $10 million to $15 million, with indexing for inflation beginning after 2026. That means future sellers may see even larger tax-free exits.
2. Introduces a tiered system for earlier exits
Owners no longer need to wait the full five years to see meaningful benefits. For QSBS issued after July 5, 2025, sellers may qualify for partial gain exclusion after only three years:
| Holding period | Exclusion percentage |
|---|---|
| 3 to 4 years | 50% |
| 4 to 5 years | 75% |
| 5+ years | 100% |
This gives founders more flexibility, which is particularly helpful in fast-moving industries where five-year exits are less common.
Important limitations to keep in mind
The OBBBA’s expanded benefits apply only to stock issued after July 5, 2025. Stock issued earlier remains subject to the traditional five-year rule.
Additionally:
● Some states, including California and New Jersey, do not recognize the QSBS exclusion for state tax purposes.
● Foreign investors and tax-exempt entities generally don’t benefit because they are not subject to federal capital gains tax.
Protecting Your QSBS Benefits
QSBS is a valuable tax incentive available for small business owners, but it is highly dependent on documentation. Uncertainty around issuance dates, asset valuations or corporate structure can jeopardize eligibility, sometimes years later when an exit is already in motion.
Founders and shareholders should confirm:
● When and how stock was issued.
● Whether gross asset limits were met.
● That the corporation remained eligible throughout the required period.
Early planning is far easier than trying to repair the record before a sale.
Planning ahead
QSBS and the OBBBA create powerful opportunities for business owners to preserve more of the value they’ve built, but these rules are technical and timing-sensitive.
If you have questions about how QSBS applies to you or your business, consult with your tax advisor or attorney. See IRC §1202 for additional statutory detail.