The One Big Beautiful Bill Act of 2025 (OBBBA) made the tax advantages of founding and investing in certain types of small businesses even more generous. Shareholders can exclude from income up to 100% of the gain realized from the sale of qualified small business stock (QSBS) if they hold the shares for more than five years (up to a specific dollar cap). This powerful incentive is intended to help startups and other small businesses raise capital to fund growth.
To qualify, the stock must be issued by an active U.S. C corporation with gross assets (cash plus the adjusted basis of property) that don’t exceed a certain amount, among other requirements. Some types of businesses are ineligible, including professional services, financial and investment services, banking, leasing, insurance, health care, hospitality, and mining.
Expanded tax benefits
For QSBS issued after July 4, 2025, shareholders may benefit from some significant changes, including:
- The asset limit for a corporation to be considered a qualified small business was increased from $50 million to $75 million. This amount will be adjusted for inflation starting in 2027.
- To qualify for 100% exclusion of gain, investors will still have to hold shares for more than five years, but a 50% exclusion now applies if shares are held for at least three years, and a 75% exclusion applies if shares are held for at least four years.
- For shares issued prior to OBBBA, the maximum gain on the sale of QSBS that an individual could exclude was 10 times the basis or $10 million. This limit has increased to $15 million ($7.5 million if married filing separately).
Who stands to gain?
This tax break applies only to original issue stock acquired from the company, not to stock purchased on the secondary market. Shares may be acquired in exchange for money, property, or compensation. In fact, qualifying businesses often use their stock as an incentive to attract and retain key employees. However, if QSBS is received as part of a deferred compensation plan, the holding period will not commence until the value of the stock is included in the employee’s income. Because businesses are defined as small based on a snapshot of the assets on their balance sheets, asset-light businesses like technology companies may qualify for QSBS treatment even if they have much higher valuations.
When a business is involved in a qualifying activity and a nonqualifying activity — think technology and financial services (fintech) or manufacturing and health care — it can be difficult to determine whether its shares qualify as QSBS or not. Moreover, not all states recognize QSBS tax treatment, and those that do may not have the same requirements. Be sure to consult a tax and/or legal professional who is familiar with the law in your state.
If you need help, contact the experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosure: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products. |