Investing in Qualified Small Business (QSB) stock is now more attractive than ever thanks to expanded tax benefits introduced by the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025. This legislation enhances the tax-saving opportunities available to investors who purchase stock in eligible small businesses.
What Is Qualified Small Business (QSB) Stock?
QSB stock refers to shares in a U.S. C corporation that meets specific criteria. The OBBBA has eased one of these requirements, allowing more businesses to qualify.
QSB Requirements
- Active Trade or Business
The corporation must be actively engaged in a qualified trade or business. Excluded fields include:- Service businesses in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services
- Banking, insurance, financing, leasing, investing, and similar businesses
- Farming operations
- Oil, gas, and mining businesses
- Hospitality businesses (hotels, motels, restaurants)
Additionally:
- At least 80% of assets must be used in qualified active business operations.
- No more than 10% of assets can be nonbusiness real estate.
- Asset Ceiling
- Before OBBBA: $50 million in aggregate gross assets
- After OBBBA: Increased to $75 million for stock issued after July 4, 2025
- Adjusted for inflation starting in 2026
Subsidiary assets are included if the issuer owns more than 50% of another corporation. Exceeding the threshold after issuance does not disqualify the stock.
Capital Gain Exclusion: A Valuable Tax Break
Historical Exclusions
- 50% exclusion: Stock held ≥ 5 years (original rule)
- 75% exclusion: Stock acquired between Feb 17, 2009 – Sep 27, 2010
- 100% exclusion: Stock acquired on or after Sep 28, 2010
OBBBA Enhancements
For QSB stock acquired after July 4, 2025:
- 75% exclusion: Held ≥ 4 years
- 50% exclusion: Held ≥ 3 years
If stock is received via gift or inheritance, the original holding period is added to the recipient’s.
Additional Rules to Know
Original Issuance Requirement
To qualify for the exclusion, you must acquire the stock:
- Directly from the corporation (or underwriter)
- In exchange for money, property (not stock), or services
Exceptions: Stock received by gift or inheritance
Exclusion Limits
Annual exclusion per issuer is limited to:
- $10 million, or
- 10× your aggregate adjusted basis in stock sold during the year
State-Level Considerations
Some states do not conform to federal QSB exclusions. State taxes may still apply.
Tax Deferral Opportunity: Rollover Provision
If you reinvest proceeds from QSB stock sale into new QSB stock within 60 days, you can defer capital gains tax:
- The gain reduces your basis in the new stock
- Holding period of the old stock is added to the new one
This also applies to stock conversions within the same corporation.
Final Thoughts: Consider More Than Just Taxes
While QSB stock offers significant tax advantages, investors should also evaluate:
- Investment goals
- Time horizon
- Risk tolerance
Contact Emil Estafanous, CPA, CFF, CGMA to discuss how QSB stock fits into your financial strategy and tax planning.