Summarizing OBBBA’s Changes to QSBS (Webinar with Frost Brown Todd)
The One Big Beautiful Bill Act (OBBBA) has introduced the most significant changes to Qualified Small Business Stock (QSBS) in over a decade. For founders, investors, and advisors, these updates offer expanded benefits, new planning opportunities, and critical shifts in strategy.
The law’s changes to Section 1202 introduce three key elements that affect how gains are excluded, who qualifies, and how stock should be structured and sold going forward. These rules are already altering how startups are formed, how capital is deployed, and how equity is managed.
Recently, we participated in a joint webinar (“Understanding OBBBA’s Section 1202 Revisions'“) with Frost Brown Todd and attorneys Scott Dolson and Brian Masterson. Scott is one of the most prolific writers on QSBS, publishing more than 50 related articles and spanning every topic imaginable related to QSBS and QSBS Rollovers. Brady Weller (from our team) joined for the webinar, and we’re publishing a summary of the main points, below. You can also listen to the audio version on our “QSBS, Solved” podcast.
July 4, 2025: A Defining Cutoff
The central distinction under the new law revolves around the date of stock issuance. Stock issued on or before July 4, 2025 is subject to the legacy Section 1202 framework. Stock issued after that date follows the OBBBA rules. The distinction is important because only post-OBBBA stock is eligible for the updated benefits, including the larger gain exclusion and revised asset limits.
This cutoff creates new considerations for timing, rollover planning, and transaction structuring. While some have asked whether it’s possible to “convert” pre-OBBBA QSBS into post-OBBBA QSBS through restructuring or rollover techniques, the statute’s language strongly suggests otherwise. Provisions in Section 1202 and Section 1223 preserve the original acquisition date, even through stock-for-stock reorganizations or Section 1045 reinvestments.
Startup founders and investors will get a huge boost from the new QSBS changes.
The New Tiered Holding Period
One of the most impactful changes is the introduction of a tiered gain exclusion based on holding period. Under the new rules:
Stock held for at least three years but less than four qualifies for a 50 percent exclusion
Stock held for at least four years but less than five qualifies for a 75 percent exclusion
Stock held for five years or more still qualifies for a 100 percent exclusion
This structure adds new flexibility and unlocks planning pathways that were not available under the previous all-or-nothing five-year rule. Investors and founders facing a liquidity event in years three or four can now capture meaningful tax savings, where previously they would have been fully taxed unless they opted for a rollover.
Shorter holding periods also reduce the risk of long-term deferral strategies. The tiered system may encourage more stakeholders to remain in C corporations and pursue equity strategies that allow for near-term exits with partial gain exclusion.
A Higher Exclusion Cap, with Inflation Protection
The lifetime gain exclusion under Section 1202 has increased from $10 million to $15 million for post-OBBBA QSBS. The cap is also now indexed for inflation, helping preserve its value over time.
This increase is substantial and affects how founders and investors manage equity blocks. When both pre- and post-OBBBA stock is involved, the order of sale can be critical. Selling pre-OBBBA stock first allows taxpayers to maximize the legacy $10 million exclusion, then apply the remaining $5 million cap to subsequent post-OBBBA sales. Reversing the order could cause a taxpayer to hit the $15 million ceiling too early and miss out on otherwise available exclusion.
Modeling different sequencing options is now a key part of effective planning, especially for those with multiple rounds of stock issuance across the July 4 threshold.
The Expanded Gross Asset Limit
The threshold for aggregate gross assets has increased from $50 million to $75 million for purposes of QSBS eligibility. This amount will also adjust for inflation in future years.
This change makes a significant difference in the startup ecosystem. In the past, companies often exceeded the $50 million limit by the time they completed a Series B round. This meant that stock issued to later hires or investors no longer qualified for QSBS treatment. Under the new rules, the majority of companies raising capital through Series B may continue to issue QSBS-eligible equity, preserving tax benefits for new participants.
The increased threshold also benefits private equity roll-up strategies and later-stage funding rounds where additional equity issuance would have previously disqualified the business from QSBS eligibility. In many cases, this opens the door for additional planning with employee stock plans, founder recaps, and investor allocations.
Touch base with our team today to learn about QSBS Rollovers and maximizing your post-exit gains.
Rollover Considerations Under Section 1045
While rollover provisions under Section 1045 remain intact, the new holding period structure changes how they are viewed. Under prior law, an early exit meant a taxpayer needed to roll the entire gain and hold the replacement stock for at least five years to benefit again. Now, post-OBBBA replacement stock becomes eligible for partial exclusion as early as year three.
This creates more opportunities for early exits followed by reinvestment into qualifying businesses, especially in industries where holding periods are naturally shorter or where liquidity is needed before a full five-year term. The expanded flexibility allows for more strategic rollover planning and lowers the risk associated with locking capital away in long-term illiquid investments.
Strategic Implications for Planning
The updates to Section 1202 signal clear legislative support for C corporation formation and QSBS participation. Far from scaling back the benefit, Congress has expanded access and increased its attractiveness as a planning tool for founders, investors, and advisors.
The new rules increase the importance of:
Tracking stock issuance dates and terms with precision
Evaluating entity structure based on tax goals, not just operational needs
Modeling sale sequences when multiple blocks of QSBS are involved
Reviewing eligibility for additional stock issuance under the new asset thresholds
Considering shorter rollover timelines for earlier-stage exits
These updates also introduce new complexity, particularly in relation to effective dates, rollover sequencing, and audit exposure for aggressive restructuring. With limited case law and few IRS rulings in the QSBS space, careful documentation and conservative assumptions remain important.
A More Flexible, More Powerful QSBS Landscape
The One Big Beautiful Bill Act does more than revise Section 1202. It modernizes the provision, aligns it more closely with today’s startup funding environment, and signals a continued commitment to incentivizing investment in small businesses.
For founders, it increases the upside potential of equity compensation and raises the stakes for thoughtful entity formation. For investors, it provides earlier paths to partial exclusion and improved rollover outcomes. For advisors, it requires renewed attention to detail, compliance, and modeling as the next wave of QSBS planning takes shape.
