The One Big Beautiful Bill Breakdown: Qualified Small Business Stock Under Section 1202

The One Big Beautiful Bill made significant changes to the Section 1202 rules for Qualified Small Business Stock (QSBS), providing significant tax planning opportunities for both investors and businesses.

Under Section 1202, eligible C Corporation shareholders can exclude capital gain from the disposition of their stock, subject to certain limitations and requirements. The QSBS changes will allow more C Corporations to issue QSBS and allow shareholders to partially benefit from the gain exclusion if they do not hold the stock for five years.

The Previous Tax Law

For QSBS acquired before the enactment of the One Big Beautiful Bill, noncorporate taxpayers can exclude capital gains from dispositions of QSBS up to the greater of $10 million or 10 times the tax basis in the disposed stock.

There are several requirements and limitations, including:

1. The stock must be from a domestic C Corporation.
2. The stock must be acquired at original issuance (i.e., direct from the corporation for property or services provided by the shareholder) after August 10, 1993.
3. To issue QSBS, the qualifying corporation must have gross assets, calculated by reference to tax basis, of $50 million or less through the date of issuance.
4. The qualifying corporation must conduct a “qualified active trade or business” with at least 80% of its assets. (Certain businesses, such as those that provide legal, accounting, medical, consulting or other services, do not qualify.)
5. The shareholder must hold the qualifying stock for five years.
6. Generally, non-corporate taxpayers (i.e., individuals and trusts) are eligible for the gain exclusion.
7. The exclusion of capital gain is limited to the greater of $10 million per taxpayer or 10 times the taxpayer’s tax basis in the disposed stock.
8. The exclusion is 100% for stock acquired after September 27, 2010, and 50% or 75% if acquired prior to that date.
9. Redemptions can disqualify shareholders and potentially the entire corporation from Section 1202 QSBS status.
10. The Section 1202 QSBS exclusion is taken at the individual shareholder level.

New and Final Law Under the One Big Beautiful Bill

For QSBS issued after the bill’s enactment on July 4, 2025, the requirements have been changed to allow for a shortened holding period, an increase to the $10 million limitation and an increase to the limit in the gross asset test.

Specifically, for QSBS issued after July 4, 2025:

1. There is a shortened holding period.
   1. A 50% exclusion for a three-year hold
   2. A 75% exclusion for a four-year hold
   3. The same as the prior law, a 100% exclusion for a five-year hold
2. The $10 million exclusion was increased to $15 million (indexed for inflation). As a result, the gain exclusion is now the greater of $15 million or 10 times the shareholder’s tax basis in the disposed stock.
3. The gross asset test is now a $75 million limit (indexed for inflation), increased from $50 million.

What It Means for You

The new law will expand opportunities for shareholders and corporations to meet the requirements for the gain exclusion, providing significant tax planning prospects for both businesses and individuals.

In addition, we expect the new law will enhance the ability of qualifying corporations to attract capital. It remains critical to consult with tax professionals to document your qualifications and holding period with respect to Section 1202 QSBS.

To learn more about how the One Big Beautiful Bill and this specific provision may impact you, contact your Warren Averett advisor.