The QSBS Tax Exclusion Just Got Bigger: What Business Owners Need to Know
I’ve written before about turning a business sale into wealth that lasts beyond a single generation, covering both the tax mechanics of a sale and the family conversations that determine whether proceeds actually last. There’s a timely, tactical update that deserves its own explanation: the rules around Section 1202, the Qualified Small Business Stock (QSBS) exclusion, changed materially in 2025, and the changes make this one of the more significant tax planning tools available to some owners of C corporations.
A Quick Refresher
Section 1202 allows shareholders in a qualified small business, organized as a C corporation, to exclude gain from federal income tax when they sell their stock. It is not a deduction that reduces taxable income. It is an exclusion: shareholders may exclude some or all of the eligible gain from federal income tax, subject to limits, eligibility rules, and holding period requirements.
What Changed
Legislation enacted in 2025 (the One Big Beautiful Bill Act)1 restructured the exclusion for QSBS acquired after July 4, 2025:
- A tiered exclusion based on holding period. Hold the stock three years, and it qualifies for a 50% exclusion. Hold it four years, and the exclusion rises to 75%. Hold it five years or more, and the full 100% exclusion applies. That five-year threshold is the same one under the old rules, but the new law adds meaningful partial benefits at the three- and four-year marks instead of an all-or-nothing cliff.
- A higher exclusion cap. The per-issuer gain exclusion increased from $10 million to $15 million, and it will index for inflation starting in 2027.
- A higher qualifying company size. The gross asset test at issuance increased from $50 million to $75 million and will also index starting in 2027, meaning more mid-sized companies can qualify their stock in the first place.
The old rules generally grandfather stock issued before July 4, 2025: the five-year cliff, the $10 million (or 10 times your basis) cap, and the $50 million gross asset test. Knowing which rules apply to your specific shares is a threshold question, not a footnote.
A Worked Example
Consider a simplified scenario: a founder holding QSBS-eligible stock gifts shares to trusts for three children five years before an eventual sale. If the family structures the gifting properly, with genuine economic substance and independent trustees, each trust may qualify for its own exclusion, up to the applicable cap, against the gain the trust realizes when it eventually sells that portion of stock. Multiply that across a family, and the aggregate tax-advantaged capacity may move well beyond what a single shareholder’s exclusion would provide alone. The mechanics require careful trust drafting, valuation support, and time. This is a strategy to design with your attorney and tax advisor, not attempt informally or late.
Why This Matters Beyond the Tax Bill
The exclusion applies per shareholder, not per company. That fact is what makes QSBS relevant to a generational wealth conversation, not just a tax conversation. If an owner gifts shares to a spouse, children, or a properly structured trust well before a sale, each recipient may have their own exclusion available against their own future gain. A family that plans ahead may be able to increase the aggregate exclusion across multiple eligible family members or trusts, potentially moving value to the next generation while helping to reduce the family’s aggregate tax bill.
This only works with lead time. Once a sale is imminent, gifting equity raises the valuation and IRS scrutiny questions I touched on in an earlier article on the mistakes business owners make before a sale. The QSBS clock and the estate-planning clock both run in years, not weeks.
What to Do Now
- Confirm your entity structure now. QSBS requires a C corporation. If you operate as an S corporation, LLC, or partnership, the exclusion doesn’t apply unless you convert, and converting brings its own tax consequences that your advisor should model.
- Determine your issuance date and holding period. Whether you fall under the old five-year cliff or the new tiered structure depends on exactly when your company issued the stock.
- Model the family gifting opportunity early. If a sale is more than two years away, ask your wealth planner and tax advisor whether placing shares in a trust for your children now could create additional exclusions later.
- Don’t wait for the LOI. Every strategy above depends on time you don’t get back once a deal is in motion.
Key Takeaways for C-Corporation Owners
The math around Section 1202 got more generous in 2025, but it rewards owners who plan years in advance, not weeks. If you own a C corporation, or are considering whether a conversion to a C corporation may be appropriate, this deserves a specific conversation with a tax advisor before your next planning cycle.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment, tax or legal advice from Savant. Tax law is subject to change, and QSBS eligibility depends on numerous factual and legal requirements specific to your situation. Please consult your investment, tax or legal professionals regarding your unique circumstances before making any related decisions.
Source:
1 One Big Beautiful Bill Act, Pub. L. No. 119-21, 139 Stat. 72 (2025) (amending I.R.C. § 1202), signed into law July 4, 2025. For a summary of the specific changes to the QSBS holding-period tiers, per-issuer exclusion cap, and gross asset test, see Benjamin M. Willis, “Changes to Section 1202, Qualified Small Business Stock, in the One Big Beautiful Bill Act,” Baker Tilly, July 15, 2025.
Scooter Thomas
Financial Advisor
CFP®, ChSNC®, ChFC®