For many business owners, selling a company represents the culmination of years of work and risk-taking. It’s also likely one of the most significant taxable events in their financial lives. Fortunately, there’s a powerful provision in the U.S. tax code that can dramatically reduce, or even eliminate, federal capital gains taxes on the sale of a business: Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code.

Recent legislative changes under the One Big Beautiful Bill Act (OBBBA) have made QSBS even more attractive for founders, entrepreneurs, and investors. The updated rules loosen prior restrictions and expand potential tax savings, creating new opportunities for thoughtful pre-sale planning.

What Is Qualified Small Business Stock (QSBS)?

Qualified Small Business Stock (QSBS) allows owners and early investors in certain C-corporations to exclude a portion, or potentially all, of their capital gains from federal taxation when the stock is sold. Under prior law, taxpayers could exclude the greater of $10 million or 10 times their cost basis in gain, provided specific criteria were met.

The OBBBA has now enhanced these benefits by increasing the exclusion cap from $10 million to $15 million, with annual inflation adjustments. It also expands the aggregate gross assets limit from $50 million to $75 million and introduces a graduated holding period rather than an all-or-nothing five-year rule. These updates make QSBS even more valuable for small business owners and investors planning for a future exit.

The New Graduated Holding Period

Previously, QSBS required a full five-year holding period before gains could be excluded. The OBBBA has replaced this with a graduated scale:

• Stock held for at least 3 years is eligible for a 50% exclusion of taxable gain.
• Stock held for at least 4 years qualifies for a 75% exclusion.
• Stock held for at least 5 years earns a 100% exclusion.

This provides much-needed flexibility for business owners who may receive a strong acquisition offer before reaching the full five-year mark.

Key Requirements to Qualify for QSBS

Despite these enhancements, the foundational rules of QSBS remain largely the same. To qualify, five key requirements must still be met:

1. C-Corporation Requirement: The company must be a C-corporation. Entities taxed as partnerships, LLCs, or S-corporations are ineligible until converted. While a C-corp structure introduces double taxation, it can yield substantial tax savings upon sale for founders planning an eventual exit.
2. Gross Assets Threshold: Under the OBBBA, the threshold for qualified small business status has risen to $75 million in gross assets at the time the stock is issued. This expansion gives business owners more room to grow before losing eligibility and allows additional time for strategic conversion from a pass-through entity to a C-corp.
3. Active Business Requirement: At least 80% of the company’s assets must be used in an active trade or business. Certain service industries are excluded, including but not limited to: financial services, law, accounting, healthcare, banking, insurance, hospitality, consulting, athletics, brokerage services, and any trade or business where the principal asset is the reputation or skill of employees. QSBS continues to be most beneficial for growth-oriented companies in technology, manufacturing, and product development.
4. Original Issuance Rule: Shares must be originally issued by the corporation, not purchased from another shareholder. This helps to ensure that QSBS rewards early participants and investors in the company’s growth rather than secondary market purchasers.
5. Holding Period Rules: For stock acquired before July 4, 2025, the old rule applies: a minimum five-year holding period is required for any exclusion. For stock acquired after July 4, 2025, the graduated holding period applies (50% exclusion at 3 years, 75% at 4 years, 100% at 5 years).

Expanded Tax Benefits Under OBBBA

The OBBBA raises the maximum exclusion from $10 million to $15 million, with future inflation adjustments. Alternatively, shareholders can still exclude 10 times their cost basis, whichever is greater. This change significantly enhances the tax planning potential for founders and investors with higher-value exits.

The OBBBA’s QSBS reforms provide three major benefits for business owners and investors:

• Extended flexibility: Founders can now remain structured as LLCs or partnerships longer, taking advantage of pass-through loss deductions during early years, before converting to a C-corp without missing QSBS eligibility.
• Higher eligibility threshold: With the asset threshold raised to $75 million, businesses have more time to scale before conversion, increasing both the potential basis and eventual exclusion amount.
• Earlier tax savings: The graduated holding period means owners no longer have to forgo QSBS benefits if a compelling acquisition opportunity arises before the five-year mark.

These modifications aim to incentivize private investment in growth-stage companies and reduce barriers to accessing QSBS advantages.

Strategic Planning Opportunities

QSBS exclusions are still per person, per issuer, meaning they can be multiplied through thoughtful ownership structuring. By distributing shares among a spouse and properly established trusts for children, a family can stack multiple $15 million exclusions, potentially excluding tens of millions of dollars in gains from federal taxation.

QSBS remains a federal tax incentive. Some states, including Pennsylvania, California, Mississippi, and Alabama, do not conform to federal QSBS rules. In these cases, business owners can still benefit from the federal exclusion but may owe state-level capital gains tax on the sale.

When QSBS Planning Makes The Most Sense

QSBS benefits are most valuable when:

• A sale or liquidity event is expected within 3–10 years.
• The business reinvests profits rather than distributing income.
• Owners intend to grow enterprise value rather than operate indefinitely for cash flow.

For long-term operators with no intent to sell, maintaining a C-corp structure may not be optimal due to ongoing double taxation.

Example: How QSBS Savings Add Up

For example, a founder starts a C-corporation in 2026 with $1 million in capital. Five years later, the business is sold for $17 million. The gain is $16 million. Under the updated QSBS rules, up to $15 million of gain is excluded, and the remaining $1 million is taxed at the long-term capital gains rate.

If that same sale occurred after four years, 75% of the exclusion cap would still apply under the proposed graduated holding period i.e., $11.25 million excluded, with the rest of the gain taxed.

The Bottom Line

The One Big Beautiful Bill Act significantly enhances one of the most powerful tax planning opportunities for entrepreneurs. By expanding thresholds, introducing a graduated holding period, and increasing exclusion amounts, the updated QSBS framework makes strategic entity planning even more impactful.

At Equilibrium Wealth Advisors, we work closely with clients and their tax professionals to determine whether QSBS eligibility fits their broader financial and succession goals. For many business owners, early and coordinated planning could mean millions in long-term tax savings. Contact us today at (412) 991-1385 to see how our services can benefit your financial future.

Disclaimer: This material is provided for informational purposes only and should not be construed as tax, legal, or investment advice. Examples provided are hypothetical and simplified for illustration purposes only. Individual circumstances may vary significantly. The tax rules described herein are complex and subject to various limitations and exceptions not discussed here. -Tax laws are complex and subject to change. Please consult your CPA, attorney, or qualified financial professional before making decisions related to QSBS or business entity structure.