There were winners and losers in H.R. 1 of the 119th Congress, also known as the One Big Beautiful Bill (OBBB). Founders of and investors in small businesses will be winners as a result of the changes to Internal Revenue Code (IRC) Section 1202. The modifications to IRC 1202 bring enhanced value and wider availability of the tax benefits for investments in qualified small business stock (QSBS).
The OBBB brings three principal changes to IRC 1202.
- Shorter holding period.
Owners of stock acquired after the date of enactment of the OBBB, July 4, 2025 (the applicable date), are eligible for QSBS benefits once the stock is held for at least three years. Owners are able to exclude the "applicable percentage" of gain from the sale of their stock based on the amount of time such stock is held (limited by the $15,000,000 and basis caps discussed below). The table below sets forth the new sliding scale.
| Years Stock Held: | Applicable Percentage: |
|---|---|
| Three years | 50% |
| Four years | 75% |
| Five years or more | 100% |
For stock acquired on or before the applicable date, owners of QSBS are only able to exclude gain from the sale of stock held for more than five years. For QSBS stock acquired after the applicable date, this change will significantly increase the availability of the tax incentive by making it available to investors with a shorter holding period. If confronted with an opportunity to sell their stock after three years, but before five years, investors would need to evaluate the benefits of selling "early" without receiving the full benefit of a 100% exclusion.
- Higher exclusion amount.
Owners of QSBS acquired after the applicable date are eligible for a baseline exclusion of $15 million. This is an increase from the $10 million in baseline exclusion for stock acquired on or before the applicable date. Beginning in tax year 2027, this baseline exclusion number for stock acquired after the applicable date will adjust for inflation.
Notably, this increase in the baseline exclusion number does not impact the 10X basis limitation in IRC 1202(b)(1)(B). The limitation on a stockholder's gain from the sale of QSBS is based on the greater of (A) the baseline number referenced above or (B) ten times the aggregate adjusted bases of QSBS issued by such corporation and disposed of by the taxpayer during the taxable year. This second limitation remains in place, which can present opportunities for taxpayers to amplify their gain exclusion beyond the baseline amount.
- Increased aggregate gross asset limit.
The corporation-level asset test for being a "qualified small business" will be easier to satisfy for investments made after the applicable date. What was once a $50 million test is now a $75 million test.
The OBBB increases the aggregate gross asset limit in IRC 1202(d)(1) from $50 million to $75 million. This means that the aggregate gross assets of the corporation at all times before the issuance of stock and immediately after the issuance of stock may not exceed $75 million. This $75 million limit will also adjust for inflation beginning in tax year 2027.
Applicable Date Considerations
It is important to note that all of these changes affect stock issued after the applicable date (July 4, 2025). Thus, stockholders that acquired their QSBS on or prior to July 4, 2025 will still need to navigate the rules in place prior to the OBBB.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
