The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, modernizes Internal Revenue Code Section 1202 (Qualified Small Business Stock, or QSBS) and makes its tax benefits more accessible and more valuable to eligible noncorporate taxpayers. For stock issued after July 4, 2025, OBBBA introduces earlier partial exclusions, increases the per‑taxpayer gain exclusion cap, and raises the issuer aggregate gross asset threshold. These changes align well with typical private equity (PE) and venture capital (VC) hold periods and expand eligibility for mid‑market companies.

Why This Matters?

• Earlier Exits Can Now Benefit: The new 50% and 75% exclusions after three and four years, respectively, allow investors to capture meaningful tax savings within common PE/VC hold periods, rather than waiting the full five years.
• Larger Deals Qualify: The issuer asset cap increases from $50 million to $75 million, broadening the pool of companies that can qualify and enabling more mid‑market platform and roll‑up strategies to access QSBS benefits.
• Higher Per‑Taxpayer Caps: The per‑issuer, per‑taxpayer gain exclusion cap increases to $15 million (inflation indexed for tax years starting in 2027) or 10x basis, supporting larger exits and more meaningful after‑tax outcomes for founders, management teams, and co‑investors.
• Better Fit for Common Deal Mechanics: New issuances to fund acquisitions, management roll‑overs structured as original issuances, and C‑corporation conversions can create QSBS pathways that were harder to access under prior rules.

What Changed?

OBBBA section 1202 (QSBS) changes apply to QSBS issued after July 4, 2025; pre‑OBBBA rules continue to apply to earlier issuances.

• Holding period exclusions
  • 50% exclusion after more than three years
  • 75% exclusion after more than four years
  • 100% exclusion after more than five years
• Per‑taxpayer, per‑issuer gain exclusion cap
  • Increased to the greater of $15 million (inflation indexed beginning in 2027) or 10x the aggregate adjusted basis of QSBS disposed of during the taxable year.
  • Pre‑OBBBA cap was the greater of $10 million or 10x original basis per issuer.
• Issuer aggregate gross asset limit
  • Increased from $50 million to $75 million, measured at issuance and all prior periods; inflation‑indexed beginning in 2027.

QSBS Qualifications

Shares of stock of a corporation can qualify as QSBS stock if:

• Shares are acquired at original issuance from a domestic C corporation in exchange for money, property (not other stock), or services.
• 80% (by value) of corporate assets must be used in an active qualified trade or business during substantially all of the shareholder’s holding period. Exclusions from qualified trades or businesses include many service businesses, businesses where the reputation or skill of one or more employees is the principal asset, real estate, farming, and mining.
• The corporation meets the aggregate gross asset limit at issuance and at all prior times.
• The corporation is not a DISC (or former DISC), RIC, REIT, REMIC, or cooperative.
• The corporation does not hold greater than de minimis amounts of non-subsidiary stock or real estate.

Qualified Trade or Business

For the purpose of determining whether 80% of the assets are used in an active trade or business, any domestic or foreign business, except for the following, which are not qualified trades or businesses:

• Service businesses, such as professional services, consulting, performing arts or athletics.
• A trade or business where the principal asset is the reputation or skill of one or more of the employees.
• Financial businesses, such as banking, insurance, leasing, investing brokerage services and similar businesses.
• Real estate businesses that own, deal in or rent property.
• Farming and mining businesses.
• Hotel, restaurant, or similar businesses.

Strategies to Increase Availability for PE, VC and Founders

• Structure for Original Issuance: Plan investment steps so equity is issued directly by the corporation to investors and management, rather than acquiring from existing holders.
• C‑Corporation Conversions: Evaluate converting partnerships/LLCs or S corporations to C corporations to create QSBS eligibility for new issuances going forward.
• Platform and Roll‑Up Planning: Use QSBS‑eligible new issuances to fund add‑ons; monitor asset composition and the active business test through the hold period.
• Multiple Taxpayers and Trusts: Consider gifts to trusts or family members to multiply exclusion limitations, subject to planning, documentation and anti‑abuse rules.
• Diligence and Monitoring: Incorporate QSBS testing into pre‑close diligence and post‑close monitoring, track asset levels, business activities, redemptions, and issuances that could jeopardize eligibility.

Other Helpful Provisions

• Section 1045 Rollover: If QSBS is held for more than six months, gains can be deferred by reinvesting proceeds into new QSBS within 60 days. This is useful for investors exiting before reaching an exclusion threshold holding period.
• Section 1244 Ordinary Loss: Certain stock may qualify for ordinary loss treatment of up to $50,000 ($100,000 joint) per year if the corporation meets Section 1244 requirements. Note that qualification under Section 1244 differs from Sections 1202 and 1045, stock can qualify for one and not the other.
• Section 1411 Net Investment Income Tax (NIIT): QSBS exclusions also apply to the 3.8% NIIT.

Common Pitfalls to Avoid

• Acquiring shares from existing holders rather than via original issuance.
• Existing holders rolling their shares into a holding partnership
• Drifting into non‑qualifying activities (e.g., investment assets, real estate), such that the 80% active business test fails.
• Exceeding issuers aggregate gross assets prior to issuance.
• Insufficient records of asset levels, issuances, and uses of proceeds.
• Shares held by a C corporation or other ineligible shareholder.
• Assuming all states conform to federal QSBS rules without verification.

A&M Tax Says

OBBBA significantly expands Section 1202’s usefulness. Earlier partial exclusions match PE/VC hold periods, the higher asset cap brings more mid‑market companies into scope, and the increased per‑taxpayer limits make QSBS planning worth the effort on larger exits. For founders and management, thoughtful original issuance design can turn routine equity grants into significant tax savings. For sponsors, integrating QSBS analysis into platform and add‑on playbooks can create repeatable after‑tax value. A&M Tax helps clients evaluate eligibility, design issuances and conversions, model savings across scenarios, and maintain the documentation needed to sustain QSBS benefits.

Making the Most of QSBS

• Start Early: Evaluate QSBS at formation or at the outset of a deal, don’t wait until growth pushes assets above the cap.
• Build It Into the Deal Thesis: Coordinate legal steps to ensure original issuance and active business tests are met and track them through exit.
• Model Alternatives: Compare outcomes under three, four and five year exits, including Section 1045 rollover options.
• Document Everything: Maintain support for asset levels, business activities, issuances, basis, and holding periods.

How A&M Can Help?

Alvarez & Marsal’s Tax team advises founders, portfolio companies, and sponsors on Section 1202 planning, conversions to C‑corporation status, original issuance mechanics, transaction structuring for add‑ons, and compliance with active business and asset tests. We model expected savings, assess eligibility, and prepare the documentation needed to defend your QSBS position.