QUALIFIED SMALL BUSINESS STOCK

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History & Background

Since 1993, taxpayers have had the opportunity to exclude Federal capital gain on the sale Qualified Small Business Stock (QSBS). Taxpayers who hold QSBS have been able to exclude up to 100% of capital gain on these shares for federal tax purposes if certain requirements are met. Under the original rules, for a stock to be considered QSBS, the following criteria were required to be met:

  1. The stock must have been directly acquired via an original issuance from a U.S. C-Corporation
  2. Shares of the company needed to be held for at least five years by the taxpayer
  3. The Company’s assets must not exceed $50M at time of issuance of the stock
  4. The percentage of eligible gain exclusion was determined by the acquisition date:
    1. 100% Exclusion – stock acquired on or after September 27, 2010
    2. 75% Exclusion – stock acquired between February 19, 2009 and September 26, 1010
    3. 50% Exclusion – stock acquired between August 11, 1993 and February 18, 2009
  5. The taxpayer is capped to a lifetime gain benefit per issuer of the greater of $10M or 10x their QSBS cost basis.

New Rules under the OBBBA

Among the many tax law changes and updates brought about by the One Big Beautiful Bill Act (OBBBA) was a revision to the QSBS rules. First, the gross asset threshold for C-Corporations was increased to $75M. This change accounts for years of inflation and increases the number of potential corporations that can qualify to issue QSBS. Additionally, the gain exclusion thresholds have changed to the following:

  1. There are now partial gain exclusions available for those holding shares less than 5 years.
    1. 100% Exclusion – 5-year holding period
    2. 75% Exclusion – 4-year holding period
    3. 50% Exclusion – 3-year holding period
  2. The lifetime gain benefit cap has been increased to the greater of $15M or 10x basis in the QSBS

Please note that the new QSBS rules under OBBBA only apply to QSBS shares issued on or after July 4, 2025. If taxpayers own QSBS shares issued prior to that date, they are subject to the original rules.

If you have any questions about these changes to the QSBS rules, feel free to reach out to your DKC representative.

 

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