Consider the Qualified Small Business Stock Exclusion

Small Business Solutions

By Steven A. Holt On Feb 9, 2026

The gain exclusion generally only applies to QSBS originally issued to the taxpayer or acquired by gift from the original taxpayer. Several states offer comparable exclusions.

The One Big Beautiful Bill Act (OBBBA) made significant changes to Section 1202. The changes are applicable only to QSBS issued after the adoption date of the OBBBA, July 4, 2025. Thus, different rules will apply with respect to QSBS acquired by a taxpayer before or after the adoption date.

The exclusion is limited by a dollar cap, which is different for QSBS acquired before or after the OBBBA adoption date. The OBBBA limits the exclusion to $10 million per taxpayer per issuing corporation (subject to percentage reductions based on the taxpayer’s holding period).

For QSBS issued prior to the adoption date, the exclusion is limited to the greater of $10 million or 10% of the taxpayer’s basis in the taxpayer’s QSBS.

What is a Qualified Small Business (QSB)?

• The business must be a domestic C corporation.
• At least 80% of the assets of the QSB must be used in a trade or business, excluding service and investment businesses.
• The value of the QSB’s gross assets cannot exceed, at any time after formation, $50 million ($75 million if the taxpayer’s QSBS is issued by a QSB after the adoption date).

Who is an eligible taxpayer?

• Must be an individual, including some pass-through owners
• Has held the QSBS for a designated holding period; 5 years for grandfathered QSBS
• Tiered structure under the OBBBA, with different exclusion percentages based on the holding period for QSBS issued after the OBBBA adoption date:
  • 50% of gain is excluded if the QSBS is held for at least 3 years but less than 4 years
  • 75% of gain is excluded if the QSBS is held for at least 4 years but less than 5 years
  • 100% of gain is excluded if the QSBS is held for more than 5 years

Practical takeaways and planning

Business owners planning to take advantage of the exclusion must be willing to sell the stock of the QSB in a liquidity event. However, many business buyers prefer to purchase the assets of the company. The selling eligible taxpayer may need to insist on a stock sale, which could limit the number of interested buyers.

Founders of businesses will need to consider operating their businesses as C corporations, instead of pass-through entities. Founders will have to weigh the long-term benefits of pass-through taxation against losing the benefits of Section 1202.

About the Author: Steven A. Holt is the chair of the tax, trusts and estates practice group at Mandelbaum Barret PC in Roseland.

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