John E. Chapman Chief Executive OfficerOn July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. Tucked into its tax changes is a significant expansion of Section 1202 of the Internal Revenue Code, the Qualified Small Business Stock (QSBS) gain exclusion. It’s a tool that’s been around since 1993 but rarely used to its full potential, and the new law makes it bigger, faster to reach, and open to more companies than before.
For an owner who structures (or restructures) their company as a C corporation, Section 1202 can mean paying zero federal capital gains tax on some or all of the profit from an eventual sale.
What Is Section 1202?
Section 1202 allows a non-corporate shareholder, meaning an individual or certain trusts, to exclude some or all of the capital gain recognized on the sale of “qualified small business stock.” To qualify, the stock generally has to be issued directly by a domestic C corporation engaged in an active trade or business, held for a minimum period, and acquired while the company was still under a certain size. Under the old rules, that meant a strict five-year holding period, an exclusion capped at the greater of $10 million or 10 times the shareholder’s basis, and eligibility limited to companies with no more than $50 million of gross assets at the time of issuance.
What Changed Under OBBBA?
For QSBS issued or acquired after July 4, 2025, three key numbers moved in the taxpayer’s favor.
The holding period is now shorter and tiered instead of all-or-nothing. Hold the stock for three years and 50% of the gain is excludable. Four years gets you 75%. Five years still gets you the full 100%.
The exclusion cap also went up, from $10 million to $15 million per issuer (or 10 times basis, if that’s greater), and it will be indexed for inflation starting in 2027.
The size ceiling on qualifying companies also rose from $50 million to $75 million of aggregate gross assets, which brings a lot more mature, better-capitalized businesses into eligibility.
Stock issued on or before July 4, 2025 stays under the old rules: the five-year cliff and the $10 million cap. A taxpayer also can’t reset the acquisition date by exchanging old QSBS for new QSBS just to reach the more generous terms.
Who Is Affected?
Anyone who owns, or is considering forming, a domestic C corporation engaged in an active qualified trade or business stands to benefit. That includes founders, key early employees who receive equity, and outside investors who take a stake in a small or mid-sized company. Unfortunately, certain service-oriented fields (health, law, accounting, financial services, and consulting among them) generally don’t meet the “active qualified trade or business” definition, no matter how the entity is structured, so not every business owner will be eligible.
How Can a Small Business Owner Take Advantage?
If you’re forming a new business, or the higher size threshold now brings your existing S corporation or LLC within reach, it’s worth modeling out whether a C corporation structure makes sense. QSBS eligibility only starts running from the date of a qualifying stock issuance, so the earlier that clock starts, the better.
Timing matters too. The enhanced benefits apply only to stock issued after July 4, 2025, so owners raising a new round of capital, granting stock to key employees, or incorporating for the first time should confirm the timing lines up.
There’s also a more advanced planning angle. The exclusion cap applies per taxpayer, per issuer, and gifting QSBS to a properly structured trust for a spouse, child, or other family member well before a sale can, in the right circumstances, let a family multiply the amount of gain it shelters from tax. It takes careful drafting and real lead time, so this isn’t something to attempt close to a transaction.
Finally, fast-growing companies should keep an eye on the gross asset test as they scale. The $75 million threshold is measured at issuance, so it can be worth issuing stock to key people sooner rather than later, before the company grows past the line.
What to Watch Out For
The requirements underlying QSBS are detailed and unforgiving. Missing any one of them (the active business test, the original issuance requirement, redemption restrictions, and a handful of others) can put the entire exclusion at risk. Any gain that isn’t excluded is still taxed at a 28% capital gains rate plus the 3.8% net investment income tax. This is a strategy that rewards planning well ahead of a liquidity event, not after one.
Contact your Clearwater Capital Partners Advisor or the Advanced Planning group if you’d like to discuss whether a QSBS strategy fits your business or investment plans.
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