For every successful business owner, the time comes when it’s necessary to begin shifting focus, spending less time covering the day-to-day bases—payroll, inventory, revenue, marketing, and sales—and looking more intently at the value of the business as a whole, particularly its potential value as an asset for sale. After all, the majority of small business owners have a significant percentage of their net worth tied up in the business, so when it comes time to think about retirement (or at least taking a step back from active management), getting the best possible price for the enterprise becomes a major consideration for funding a desired post-exit lifestyle. All this makes business exit tax planning, proper valuation, business structure, and succession planning vital considerations, ideally begun well before the planned sale date.
QSBS and OBBBA
For owners and other major shareholders of small business organized as C corporations, the 2025 passage of the One Big Beautiful Bill Act (OBBBA) may offer enhanced opportunities for major federal tax savings on the sale of qualified small business stock (QSBS). While the Section 1202 exclusion from capital gains taxation for qualified small business stock has been around since 1993, the 2025 tax law changes to QSBS can provide additional flexibility and potentially larger ceilings for qualified sellers. Let’s take a look “under the hood” of this C-corp capital gains exclusion to see how the latest tax law changes could benefit those selling a small business.
What is qualified small business stock (QSBS)?
Qualified small business stock refers to shares in certain domestic US C corporations that qualify for major federal capital gains tax exclusions under Section 1202 of the Internal Revenue Code. Investors, employees, founders, and others who hold shares of stock in such a business may be eligible to claim an exclusion from federal capital gains taxes that would otherwise be payable upon the sale of the stock, such as when the business is sold and shares are purchased by the buyer. To qualify for the exclusion:
- The issuer must be a C corporation based in the US;
- The business’s assets cannot exceed $75 million (adjusted annually for inflation beginning in 2027);
- The business must be active, not a holding company;
- The business must be in the manufacturing, retail, technology, or wholesaling industries;
- The business stock must be acquired in exchange for money or property or as compensation for services provided to the business;
- The business stock must be held for a specified period of time before the sale (see below);
- The stock must be owned by a natural person, a trust, or the estate of a natural person (i.e., the owner may not be a corporation).
How did the 2025 tax law change QSBS?
With the passage of OBBBA in 2025, several new, potential advantages accrued to owners and others pursuing the sale of a C corporation and the subsequent liquidity event. Specifically, the C-corp capital gains exclusion acquired additional flexibility, both in the required holding period for qualified small business stock and the cap on excludable gains.
- Graduated holding period. Previously, holders of qualified shares had to hold them for a minimum of five years to qualify for the exemption; the new law allows for a graduated holding period (for stock acquired after July 4, 2025):
- for stock held 3 to less than 4 years, 50% of capital gains may be excluded;
- for stock held 4 to less than 5 years, 75% of capital gains may be excluded;
- for qualifying stock held 5 years or more, 100% of capital gains may be excluded for shares acquired after July 4, 2025.
- stock acquired before July 4, 2025 is typically still subject to the “all-or-nothing” 5-year holding period rule. Note, however, that the exclusion percentage under prior law also depends on the stock’s original acquisition date. IRS guidance still distinguishes 50%, 75%, and 100% exclusions for older vintages.
- Higher cap on excludable gains. For qualifying stock acquired after July 4, 2025, OBBBA increased the dollar-based per-taxpayer, per-issuer limit from $10 million to $15 million, indexed for inflation beginning in 2027. The applicable exclusion limit is generally the greater of that dollar amount or 10 times the taxpayer’s qualifying basis in the stock.
- Higher gross asset threshold. Previously, only C-corporations with gross assets of $50 million or less qualified; the new gross asset cap is $75 million, indexed for inflation beginning in 2027.
Can QSBS be transferred as a part of estate planning?
Section 1202 contains special rules that can preserve QSBS status and holding period when qualifying stock is transferred by gift or at death. In certain circumstances, an eligible recipient including a properly structured non-grantor trust may be treated as a separate taxpayer for purposes of the Section 1202 exclusion.
These strategies, sometimes referred to as “QSBS stacking,” seek to use these rules to create additional exclusion capacity across separate taxpayers. Note, however, that these arrangements are highly fact-specific and can implicate gift-tax rules, trust-tax rules, assignment-of-income principles, and federal anti-abuse provisions. Any such strategy should be employed only after careful consultation with tax and legal advisors.
How does QSBS fit into my business exit plan?
Given the potential of the new rules around QSBS for reducing or eliminating the federal “founder stock tax,” they deserve careful consideration as a part of both business exit and estate planning. For some businesses that are not currently organized as C corporations, the expanded QSBS rules may warrant evaluating whether a future C-corporation structure could be appropriate. However, any conversion requires careful modeling; QSBS qualification is prospective, holding-period requirements apply, and changing entity form can create significant federal, state, and corporate-level tax consequences.
It should be obvious that, due to the holding period requirements, regulatory scrutiny, and other factors, strategies like QSBS stacking or reorganization as a C-corp are not to be undertaken at the last minute. Rather, they require careful planning, well in advance of the anticipated sale of the business, and should be guided by close consultation with trusted tax, legal, and financial planning advisors.
Your Rothschild advisor can be a helpful resource if you are considering the sale of a business or any other major liquidity event. By working together with your tax and legal advisors, they can structure a sale process that keeps your best interests and those of your family foremost. To learn more about how we can assist with business succession planning, business transitions, and other important processes, please visit our website or give us a call.
What does the new, higher estate tax exemption mean for my current estate plan?
Disclosure: Rothschild Investment, LLC is an SEC-registered investment adviser and broker-dealer, member FINRA/SIPC. . Registration does not imply a particular level of skill or training. Rothschild Wealth, LLC and Rothschild Investment, LLC are affiliates and are collectively referred to as Rothschild Wealth Partners™. Please visit https://adviserinfo.sec.gov/firm/summary/162442 for additional information regarding Rothschild Wealth’s service, fees, conflicts of interest, and other important information. Investment advisory and brokerage services differ, including with respect to applicable standards of conduct, fees and compensation. Rothschild Wealth Partners does not provide legal or tax advice. Tax planning, estate planning and related services described in this material are provided for general planning and coordination purposes. Clients should consult with their attorney, CPA or other qualified tax or legal professional regarding their individual circumstances.
This material is provided for general informational and educational purposes only and is not intended as individualized investment, tax, or legal advice. Qualified Small Business Stock eligibility and the availability and amount of any Section 1202 exclusion depend on numerous factors, including the issuer, date and manner of stock acquisition, holding period, business activities, ownership structure, transaction structure, prior exclusions, and applicable federal and state law. Tax laws and regulatory guidance are subject to change. Examples are provided solely for illustrative purposes and do not guarantee any particular tax result. Individuals considering a QSBS, gifting, trust, entity-conversion, or business-sale strategy should consult qualified tax and legal professionals regarding their specific circumstances before taking action.
