The One Big Beautiful Bill Act transformed one of the best tax breaks in America into an absolute monster. If you're building a business with plans to sell, this should be on your radar.

QSBS Just Got a Major Upgrade

Qualified Small Business Stock (QSBS) has always been the holy grail of tax breaks for entrepreneurs. Now it's even better.

The headline changes:

• Tax-free gains increased from $10MM to $15MM
• Holding period reduced from 5 years to as little as 3 years (tiered benefits)
• Asset limit increased from $50MM to $75MM

That's generational wealth, completely tax-free.

What Exactly is QSBS?

QSBS has been around since 1993 with the passage of section 1202. It was created to encourage small business investment. But for 30+ years, the limits stayed frozen while everything else inflated. The OBBB finally modernized it for 2025 valuations.

To qualify for QSBS:

• Must be a C-Corporation with less than $75MM in assets
• Must be original stock issuance (not secondary market)
• Must hold for at least 3 years for partial benefit
• Must be an active business, not passive investments
• Many businesses qualify (certain service businesses excluded e.g. health, law, and accounting)

The New Tiered Benefits Are Game-Changing

Previously, you had to wait a full 5 years for any benefit. Now:

• 3 years = 50% exclusion
• 4 years = 75% exclusion
• 5 years = 100% exclusion

Let's run the numbers on a $10MM gain:

• At 3 years: Save $1MM in taxes
• At 4 years: Save $1.5MM in taxes
• At 5 years: Save $2MM+ in taxes

Without QSBS? You'd pay it all.

The VC Secret Weapon

Venture Capital has always understood the power of QSBS - these benefits flow through funds to LPs. Most limited partners don't realize they get these benefits on portfolio company exits. I've seen LPs leave millions on the table simply because they didn't know to claim it.

Who Should Restructure Immediately

1. Startups approaching or past $50MM in assets - you just got a 50% increase in headroom
2. Profitable businesses considering C-Corp conversion with exit plans
3. Anyone who thought 5 years was too long but can wait 3

The Trade-Offs Haven't Changed

The C-Corp structure still means double taxation while you hold - 21% corporate tax on profits, then taxes on dividends. There's also built-in gains tax to consider.

But if you're building to sell (not distribute), this is largely irrelevant. Most high-growth startups never pay dividends anyway.

Critical Compliance Points

• These new benefits ONLY apply to stock issued after July 4, 2025
• Get the structure right at formation (fixing later is expensive)
• Document everything at issuance
• No special election needed - just meet the requirements

State Conformity Matters

Not all states follow federal QSBS rules. California notoriously doesn't. Check your state before assuming total tax freedom. Some states may update their laws to match - worth monitoring closely.

The Bottom Line

The OBBB just took the deal of the century for builders and made it even better.

$15MM tax-free. 50% benefit in just 3 years. More companies qualify.

If you're on the fence about converting, this tips the scales.

All the best,

Mitchell Baldridge, CPA, CFP®

P.S. Thinking about your exit plan? This could be the most important tax planning you'll ever do. Find an expert you trust for advice. If you're interested in working together, fill out this form.

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