How OBBBA changes have made QSBS more interesting for business owners

While qualified small business stock sales certainly aren't the easiest exit planning maneuver, more business owners and advisors could be turning their heads thanks to a slate of changes introduced under the One Big Beautiful Bill Act.

"I would say that the benefits were made more attractive," says Kevin Brady, advisor at Wealthspire Advisors.

As originally drafted under Section 1202 of the Internal Revenue Code, the QSBS rule allows eligible business owners to potentially exclude all the capital gains from the sale of qualified small business stock from federal taxation.

Big, beautiful benefits for qualified small businesses

According to Brady, one key beneficial change pertains to the holding period requirement to qualify for the full QSBS exclusion, which originally was at least five years. Among many new tax breaks under OBBBA, there are now partial holding periods for QSBS sales, with a 50% exclusion rate for stock held for at least three years, and 75% for those who hang on to their QSBS for four years before selling.

"In a way, it's become easier for business owners, as opposed to having to wait five years," Brady says.

With the shorter three-year window for a potential federal tax exclusion to kick in, the waiting game for those planning for a business sale – counting initial conversations and signing letters of intent, he says the process often takes two years to complete – stands to be much shorter.

"On balance, it might make sense for someone to hold off on a sale or delay [to get a bigger exclusion]," he says.

Another significant change involves the total amount taxpayers may exclude. Pre-OBBBA, that amount was capped at $10 million or 10 times the basis of the stock that's sold, whichever is greater. Now, the $10 million threshold has been raised to $15 million, broadening the possible tax shield for qualified small businesses.

The third benefit, Brady says, pertains to the value of assets a company may hold while still being counted as a small business. Compared to the original $50 million mandated under Section 1202, OBBBA has raised that asset cap to $75 million, which is indexed to inflation starting in 2026, allowing more enterprises under the umbrella for a QSBS exclusion.

"That 50% increase relative to the original $50 million going back to 1993, when this was originally enacted, helps as well," Brady says.

Wickets and tripping points

Assets aren't the only wicket when it comes to the QSBS rule. As Brady emphasizes, the benefit is open only to businesses that are structured as C-corporations. Businesses that depend too heavily on the skills of the original founders – specialized financial advisory practices, to take a totally random example – will also find it difficult to qualify.

"If you make a product, sell something, even a piece of technology ... those are more likely to fit within the criteria [of the QSBS]," he says.

It's not always simple to draw the line. For instance, while businesses in the medical and legal fields are not traditionally approved for the QSBS exclusion, since doctors and attorneys have specialized expertise, Brady says technology companies with a medical or legal focus may still be eligible.

"How do you earn your revenue, and what does your company do related to that?" he says. "What's the actual legal entity of your business ... Is it an S-corp or a partnership, which is more common for smaller companies, or are you a C-corp?"

The makeup of a company's underlying assets could also be make-or-break. A company that just went through a funding round or one that has a lot of inventory may find it hard to qualify for a QSBS exclusion, while those with more goodwill or intangible assets are easier to plan around.

One common tripping point, Brady says, involves certain sales between family members or employees. Under the QSBS rule, the grantor of the shares should also be the original issuer, which means the exclusion won't carry over to secondary sales of small business stock.

"Interestingly, gifts or bequests are not problematic," he says. "If you gift it to someone, or pass away and you bequest it to someone, that kind of transfer allows you to step into the shoes of the original owner without violating the original issuance rule."

While more business owners than ever are taking an interest in tax planning, Brady stresses that they should expect to get what they pay for. Compared to tax preparation, where breaks are claimed based on what's already happened in the past year, he says planning ahead requires more work and expertise.

"There are plenty of tax professionals that do great work in that realm, but you have to be clear that that's what you want," Brady says. "You have to be ready to pay that professional more .... When you're talking about potentially tens of millions of dollars you end up not having to pay, the benefit is massive."