OBBBA Enhances IRC §1202: How the New QSBS Rules Could Save You Millions in Taxes
Introduction
The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, just made one of the most powerful tax breaks for business owners and investors even better. Under Internal Revenue Code §1202 — also called the Qualified Small Business Stock (QSBS) exclusion — you can avoid paying taxes on a large portion of the profit when you sell qualifying stock in a small business. The recent changes could mean more money in your pocket and sooner than before.
What is QSBS in Simple Terms?
If you invest in or start a qualifying small business organized as a C corporation, and you meet certain requirements, the IRS lets you exclude part — or even all — of your profit when you sell your stock. Think of it as a reward for putting your money into a small business and helping it grow.
What Changed Under OBBBA?
- Higher Tax-Free Gains
- Before: Up to $10 million in tax-free profit (or 10× what you invested).
- Now: Up to $15 million (or 10× investment) — whichever is higher.
- Indexed for inflation starting in 2026.
- Shorter Holding Periods for Partial Exclusion
- 3 years → 50% tax-free gain
- 4 years → 75% tax-free gain
- 5 years → 100% tax-free gain (same as before)
- Larger Companies Can Qualify
- Asset limit at the time stock is issued: increased from $50M to $75M, indexed for inflation in 2026.
Example: How This Works in Real Life
Scenario:
You invest $1 million in a qualifying C corporation on August 1, 2025.
- By August 1, 2028 (3 years), your shares are worth $6 million. You sell.
- Tax-free gain: 50% of $5M gain = $2.5M excluded from tax.
- By August 1, 2029 (4 years), your shares are worth $8 million. You sell.
- Tax-free gain: 75% of $7M gain = $5.25M excluded.
- By August 1, 2030 (5 years), your shares are worth $12 million. You sell.
- Tax-free gain: 100% of $11M gain = $11M excluded.
Who Can Benefit?
- Startup founders with C corp shares.
- Angel investors and venture capitalists.
- High-net-worth individuals seeking tax-efficient investment strategies.
- Business owners planning an eventual exit.
Important Caveats
- Only C corporation stock qualifies — LLCs and S corps do not.
- Certain industries are excluded (law, health, accounting, finance, hospitality, etc.).
- You must receive the stock at original issuance, not buy it from another shareholder.
- The business must maintain QSBS eligibility during your holding period.
Tax Planning Opportunities
Our team at Velin & Associates, Inc. helps clients structure investments to qualify for QSBS, document compliance, and plan sales for maximum tax benefit. With OBBBA’s enhanced rules, the potential savings are larger than ever — but so are the compliance details.
💬 Ready to See If Your Stock Qualifies?
We’ll review your holdings, business structure, and timeline to determine if you can take advantage of the QSBS exclusion — and build a plan that maximizes your after-tax profit.
Velin & Associates, Inc.
8159 Santa Monica Blvd STE 198/200
West Hollywood, CA 90046
📞 323-902-1000
📧 dmitriy@losangelescpa.org
🌐 www.losangelescpa.org
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.