QSBS Reimagined: What the New $75M Cap and Faster Gain Exclusion Mean for Startups

On July 4, 2025, Congress passed the One Big Beautiful Bill Act (OBBBA) and with it, a game-changing rewrite of Internal Revenue Code §1202 that governs Qualified Small Business Stock (QSBS). For founders, investors and early-stage CFOs, this law didn’t just tweak the code. It cracked open a new window of planning opportunity.

Two changes stand out: The cap on qualifying company assets rose from $50 million to $75 million, and the holding period for tax exclusion shrank from five years to as little as three thanks to a new phased schedule. These shifts matter deeply to growing startups, especially those in cash-intensive industries like biotech, clean energy and semiconductors, where capital needs often push balance sheets past eligibility thresholds.

If you work with venture-backed clients, lead equity planning for a high-growth startup, or manage early-stage investments, this reform is a clear signal. The government is acknowledging that early-stage innovation looks different in 2025 than it did in 2010. Capital intensity is higher. Exit timelines are more unpredictable. And the tax code is catching up.

Here’s what changed, what stayed the same and what tax professionals should be doing right now to help clients plan around the new QSBS regime.

A bigger balance sheet and a shorter wait: Understanding the new QSBS rules

The post-OBBBA version of QSBS expands eligibility while creating faster paths to liquidity. Under the new rules, C corporations can now issue QSBS until their aggregate gross assets hit $75 million, a 50% increase from the previous $50 million ceiling. Just as importantly, the law builds in automatic inflation indexing beginning in 2027. That means this threshold will keep pace with rising valuations and capital requirements.

The new phased exclusion rules are just as impactful. For QSBS acquired after July 4, 2025, capital gains can now be excluded based on a tiered holding period:

• After 3 years: 50% of the gain is excluded
• After 4 years: 75% is excluded
• After 5 years: 100% is excluded, as before

This tiered approach reflects a major philosophical shift in tax policy. Rather than forcing investors to wait a full five years to benefit from the exclusion, the law now rewards partial patience, making it easier to secure tax-advantaged liquidity while still supporting long-term investment goals.

Crucially, other eligibility criteria remain intact. To qualify:

• The company must be a domestic C corporation
• Stock must be originally issued (not purchased on the secondary market)
• 80% or more of assets must be used in an active trade or business
• Prohibited service industries, including finance, health and law, remain excluded

Companies that issued QSBS prior to July 4, 2025, still fall under the legacy system: a five-year holding requirement for full exclusion with no intermediate steps. That’s an important distinction for CFOs modeling future rounds and investor timelines.

For full statutory language and definitions, you can read the official OBBBA bill text. The IRS also offers guidance on Section 1202 and its application.

Strategic tax planning moves for founders and CFOs

The QSBS updates under the OBBBA don’t just widen the window for eligibility. They create new planning angles that founders, CFOs and tax advisors can act on now. These changes are especially relevant for companies weighing entity formation decisions, timing of equity grants and long-term ownership strategies.

First, founders running LLCs or S corporations who are considering a C corporation conversion now have added incentive to move sooner. Because QSBS status only applies to stock in a C corporation, converting before a large capital influx or asset contribution can lock in eligibility for the $75 million cap and begin the gain exclusion clock. Waiting too long, especially in capital-heavy sectors, could push the asset base beyond the threshold.

Equity compensation strategy is another area requiring immediate attention. Incentive stock options (ISOs), when exercised early, can start the QSBS holding period. That matters for employees with typical three- to four-year vesting schedules who might now qualify for 50% or even 75% exclusion upon exit. The tradeoff is potential exposure to alternative minimum tax (AMT), which makes proper modeling critical.

On the gifting front, families may want to use non-grantor trusts to “stack” QSBS exclusions across multiple taxpayers. For example, a founder could gift shares into several trusts, each of which receives its own $10 million exclusion. Timing matters here too; shares must be gifted while still qualifying and before significant appreciation occurs.

QSBS planning should now be integrated with broader tax advisory services. Our Business Tax Planning team helps clients model these scenarios in real time, incorporating potential gain exclusion, timing of grants and exit strategy alignment.

Finally, exit structuring needs a fresh look. The new three-year exclusion window means partial liquidity events (such as secondary share sales or stock-for-stock acquisitions) can create meaningful after-tax benefits earlier than before. If a transaction is on the table in year three, the difference between 50% excluded gain and a fully taxable sale may drive key negotiation points.

Sector-specific examples: Who wins big under OBBBA

The QSBS expansion was not crafted for one industry. Its design responds to modern startup dynamics, and as a result, its benefits reach across sectors. From AI and biotech to clean tech and advanced manufacturing, the $75 million asset cap and phased exclusion schedule give companies more room to grow while still offering tax incentives to investors.

Software and SaaS startups often face early valuations that push them close to the old $50 million limit by Series A or B. Under OBBBA, a company raising $30 million in seed and $40 million in Series A can now pursue another $5 million to $10 million without worrying about disqualifying future stock issuances. This expands negotiating power during term sheet discussions.

In biotech, the timelines for FDA approval and clinical trials have always made the five-year holding requirement difficult. The new 3-year partial exclusion gives early-stage investors more flexibility and interim liquidity. For example, a gene therapy startup burning $20 million annually might now offer a 50% gain exclusion by the time it hits a Series C or IPO.

Clean energy companies building hydrogen electrolyzer demo plants or grid-scale battery storage projects often need $60 million or more just to get off the ground. Previously, these asset-heavy builds would bust QSBS eligibility before Series B. Now, with a $75 million ceiling, such ventures remain in play. This is especially relevant as federal energy tax credits and grants have increased. According to McKinsey’s energy transition report, investment in clean power infrastructure has doubled since 2022, and the pipeline for capital-intensive projects continues to expand.

Semiconductor and hardware-focused companies (particularly those investing in pilot fabs or chip design) benefit similarly. These businesses can now raise larger early rounds without tripping QSBS thresholds. With government-backed initiatives to onshore advanced manufacturing, this is a strategic lever in closing funding rounds.

Investment structuring under the new QSBS regime

With the new $75 million cap and phased exclusions, investment structuring decisions matter more than ever. Investors, tax advisors and legal teams now have to model exits under multiple timelines, while layering in strategies to preserve or multiply QSBS benefits.

As mentioned earlier, QSBS stacking is a core tactic and often involves coordination between estate planners and transactional counsel. Section 1045 rollovers are another powerful tool. When a QSBS holder sells stock before reaching the full five-year mark, gains can be deferred by reinvesting in another QSBS-eligible company within 60 days. The reinvestment must meet the same active business and original issue requirements and documentation must be airtight. For serial entrepreneurs and early-stage investors, this allows capital to stay in play without triggering tax.

Partial exits are also worth modeling. Under the OBBBA ladder, a liquidity event in year three now results in a 50% exclusion. That may outperform a fully taxable exit in year two, especially in volatile markets. Strategic buyers may also structure acquisitions to allow stock-for-stock treatment, preserving QSBS for the new equity.

We often advise clients to align their equity strategies with broader estate and investment planning. Our team helps clients implement multi-entity ownership, trust stacking and timing strategies to amplify QSBS value.

Finally, exit modeling needs to be more dynamic. When to sell, how to structure the transaction, and which family members or trusts hold the shares can dramatically shift the after-tax outcome. These aren’t theoretical decisions, they’re tangible dollar-value choices.

What CPAs need to watch: Redemptions, related parties and compliance traps

While the OBBBA reforms expand QSBS eligibility, they also introduce new complexity. CPAs and tax professionals need to remain vigilant about the mechanical requirements that can invalidate QSBS, often without the founder or investor even realizing it.

One key rule is the aggregation of related entities. Under Section 1202(d)(3), if multiple corporations are controlled by the same person or group, their assets must be combined to test the $75 million threshold. This means a founder operating several similar startups cannot treat each one as QSBS-eligible in isolation. The IRS considers substance over form, so advisors should closely review corporate ownership and control structures.

Redemption activity is another common disqualifier. If a company redeems significant stock within a two-year window before or after the issuance of new stock, QSBS eligibility may be forfeited. This applies even to unrelated shareholders. As such, buybacks or recapitalizations should be carefully timed and fully documented. Many founders unintentionally trip this wire during early-stage cap table cleanups.

Another area of scrutiny is the working capital test (ensuring at least 80% of a company’s assets are used in the active conduct of a qualified trade or business). Holding excess cash, especially post-financing, can put companies at risk. The IRS provides a safe harbor for working capital held for product development, hiring or expansion. But that must be supported by board resolutions and a documented business plan.

Inconsistent documentation is a silent killer. Subscription agreements should clearly state that shares are intended to qualify as QSBS. Board minutes and investor memos should reference Section 1202. Without this paper trail, defending QSBS status in audit becomes difficult.

CPAs must also be alert to state-level conformity issues. Not all states automatically follow federal QSBS rules. A few may not recognize the three-year exclusion at all. That creates mismatch risk in multi-state exits, especially when shareholders reside in non-conforming states. This issue will continue to evolve as legislatures respond to the federal change.

Lastly, expect enhanced IRS scrutiny. With the widened benefits under the OBBBA, the IRS is likely to examine QSBS claims more aggressively, especially around asset valuation and ownership structures. Pre-issuance 409A valuations, FMV certifications and cap table documentation should be maintained and reviewed annually.

Smart tax planning for post-OBBBA QSBS: Let’s talk strategy

The OBBBA reshaped QSBS to meet the realities of modern startup growth. The $75 million asset cap, phased gain exclusion, and alignment with capital-intensive sectors create a wider, more usable benefit. But with wider benefits come tighter compliance requirements and those require thoughtful, year-round attention.

If your company is raising capital, restructuring ownership or preparing for an eventual exit, now is the time to reassess your QSBS strategy. Contact a James Moore professional to evaluate how these new rules apply to your business or investment structure.

Whether you’re structuring a financing round, issuing equity to employees or planning for a liquidity event, our James Moore tax team has the expertise to guide you through QSBS opportunities and pitfalls.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.