Big Beautiful Breakdown: What Is Qualified Small Business Stock (QSBS)?

The “One Big Beautiful Bill Act” (OBBBA), signed into law in July 2025, brought sweeping updates to tax policy—especially for entrepreneurs and investors in small businesses. One of the most impactful changes is the expansion of benefits tied to Qualified Small Business Stock (QSBS). For founders, early employees and investors, these updates represent a significant opportunity to reduce capital gains taxes and build long-term wealth.

What Is QSBS?

Qualified Small Business Stock refers to shares in a U.S.-based C corporation that meets certain requirements, such as operating in an active trade or business and having gross assets below a specified threshold at the time of stock issuance. If the stock is held for a set period, investors may exclude a portion—or even all—of the capital gains when they eventually sell.

What’s Changed Under the New Law?

The bill introduces three major changes for QSBS acquired after July 4, 2025:

• Tiered holding-period exclusions: rather than only receiving exclusion after five years, investors can now enjoy:
  • 50% exclusion after 3 years
  • 75% after 4 years
  • 100% after 5 years 
• Higher gain-exclusion cap: raised from $10 million to $15 million (or ten times basis), indexed for inflation beginning in 2027.
• Bigger eligible company size: the issuer’s gross assets threshold jumps to $75 million (adjusted annually for inflation), expanding potential QSBS issuers

Why These Changes Matter

The updated rules make QSBS far more accessible and flexible. Investors now have more incentive to engage with growing small businesses, knowing they can realize meaningful tax savings in as little as three years. For business owners and founders, the higher asset limit allows more companies to qualify as QSBS issuers, expanding the potential investor base. The increased exclusion cap also gives high-growth companies and their stakeholders the ability to shield more of their gains from taxes.

Planning Opportunities & Considerations

• Staged exits: Investors can plan tiered liquidity events to optimize tax exclusion across multiple holding periods.
• Stacking strategies: Family trusts and multiple beneficiaries can multiply the $15 million cap—common QSBS planning techniques remain viable.
• Asset cap timing: Investors should verify the $75 million threshold, especially if contributions push assets above the limit right after stock issuance.

The Bottom Line

The enhancements to QSBS under the OBBBA make this a prime tax strategy for business owners, startup investors and entrepreneurial families. Faster partial exclusions, larger caps and broader eligibility make it easier than ever to use QSBS to unlock tax-efficient growth. If you’re investing in or operating a small business structured as a C corporation, it’s time to reevaluate your stock and succession strategy with QSBS in mind.

Illumination Wealth can help you navigate these new rules to make the most of your business equity. Contact us today to get started.