The OBBBA Raised the QSBS Exclusion to $15M

The OBBBA Raised the QSBS Exclusion to $15M – Most Founders Still Haven't Heard

Last year, Congress made one of the most significant changes to a tax benefit that many business owners have never heard of. The One Big Beautiful Bill Act, signed into law on July 4, 2025, expanded Section 1202, the Qualified Small Business Stock exclusion in three meaningful ways. The exclusion cap went up. The holding period became more flexible. And more companies can now qualify.

Most founders we work with had no idea any of this happened.

That's not entirely surprising. QSBS has historically been a niche topic, associated almost exclusively with Silicon Valley startups and venture-backed tech companies. But it applies far more broadly than that – to manufacturers, consumer products companies, distributors, and any other operating business structured as a C-corporation. And with the OBBBA changes, it just became significantly more valuable for anyone who qualifies.

What QSBS Actually Is

Section 1202 of the tax code allows non-corporate shareholders – founders, early investors, employees with equity, to exclude a portion of their capital gains when they sell qualified stock. If your company meets the requirements and you've held your shares long enough, you can sell and pay zero federal capital gains tax on millions of dollars in profit.

It's not a loophole. It was deliberately written into the code in 1993 to encourage investment in small businesses. It's been there for over 30 years. Most business owners just don't know to ask about it.

The core requirements haven't changed: the issuing company must be a domestic C-corporation with qualifying gross assets at the time of issuance, at least 80% of its assets must be used in an active qualified trade or business, and the stock must be acquired directly from the company – not on the secondary market. The holding period and the exclusion cap are where the OBBBA made its mark.

The Three Changes with OBBBA That Matter

1. The exclusion cap went from $10M to $15M

Under the old rules, the maximum gain you could exclude per issuing company was the greater of $10 million or 10 times your adjusted basis in the stock. For stock issued after July 4, 2025, that dollar cap is now $15 million and it's indexed for inflation starting in 2027.

The 10x basis alternative still exists. So if your basis is high enough that 10x exceeds $15M, you'd use that number instead.

Example: a founder selling $18M in stock under the old rules would have had $8M taxable. Under the new rules, only $3M is taxable. On a $10M deal, that difference could be worth over a million dollars in federal tax savings.

2. The holding period is now tiered – you no longer need to wait five full years

This is the change that opens up the most planning flexibility. Under prior law, it was binary: hold for more than five years and get 100% exclusion, or sell earlier and get nothing. The OBBBA introduced a graduated schedule for stock issued after July 4, 2025:

• Hold 3 years → 50% of gain excluded

• Hold 4 years → 75% of gain excluded

• Hold 5 years → 100% of gain excluded

For founders facing real-world liquidity pressure – an acquisition offer, investor timelines, co-founder circumstances – this flexibility matters.

But there's a trap worth knowing. The portion of gain that isn't excluded under the 3-year or 4-year rules is taxed at 28%, not the standard long-term capital gains rate of 15% - 20%. That means selling at year three or four isn't always the right call, even if you technically can. In many scenarios, waiting to hit the 5-year mark produces a better outcome. Run the math before you decide.

3. The gross asset threshold increased from $50M to $75M

To issue QSBS, a company's gross assets must be under the threshold at the time of stock issuance. Under prior law, that limit was $50M, which created problems for companies that had raised significant capital, since the cash itself counts toward gross assets.

Under the OBBBA, that threshold is now $75M for stock issued after July 4, 2025, also indexed for inflation after 2026. This means more later-stage companies can continue issuing qualifying stock through subsequent funding rounds. If you previously assumed your company had grown past the QSBS window, it's worth revisiting.

Four Planning Moves That Follow From This

1. Stacking exclusions across family members

The $15M exclusion applies per taxpayer, per issuing company. With proper planning, gifting shares to a spouse, adult children, or family trusts, a family could potentially multiply the available exclusion from a single company's stock. This requires careful coordination with both tax and legal counsel, but it's a legitimate strategy that sophisticated founders use.

2. Timing your exit relative to the holding period

If you're at four years and eight months, consider waiting four more months. The math between 75% exclusion (with 28% on the remainder) and 100% exclusion is often worth six figures on a typical deal. Don't make an exit timing decision without running that number first.

3. State tax non-conformity

The QSBS exclusion is federal. Not every state conforms. California, New Jersey, and Pennsylvania, among others, do not recognize the exclusion, meaning fully excluded federal gain can still be taxable at the state level. Texas conforms, which is favorable if you're based here. But if your co-founders, investors, or key employees are in non-conforming states, they need to understand this before a liquidity event.

4. Entity conversion as a planning move

If you're currently operating as an S-corp or LLC and a sale or capital raise is on the horizon, converting to a C-corporation now would allow future stock issuances to fall under the new OBBBA rules. There are real tax implications to conversion – built-in gains rules, timing considerations – but the long-term QSBS benefit can outweigh them significantly. This is a conversation worth having early, not after you've signed a term sheet.

Who Should Be Paying Attention to This

If you founded or co-founded a company, received stock at original issuance, and haven't reviewed your QSBS eligibility recently, this is worth putting on your calendar.

If you're planning a sale, a capital raise, or a liquidity event in the next three to five years, the planning needs to start now. QSBS isn't something you can retroactively qualify for. The clock starts when the stock is issued, and the structure has to be right from the beginning.

If you own a manufacturing, consumer products, or technology business structured as a C-corporation, this likely applies to you in ways you may not have fully explored.

At Vallou, QSBS planning is one of the highest-value conversations we have with founders and business owners. If you have questions about whether your stock qualifies, or you want to think through exit planning in light of the OBBBA changes, feel free to reach out.