Investing in qualified small business stock (QSBS) can be a powerful strategy to diversify your portfolio while unlocking valuable tax savings. Thanks to recent changes under the One Big Beautiful Bill Act (OBBBA), which was signed into law in July, investors now have access to expanded tax benefits when purchasing QSB stock.
What Is Qualified Small Business (QSB) Stock?
A qualified small business (QSB) is generally a U.S. C corporation that meets specific criteria. Under the new law, more companies now qualify:
- Active Business Requirement
- A QSB must be engaged in an active trade or business.
- Certain industries are excluded, including health, law, engineering, architecture, accounting, consulting, financial services, banking, insurance, farming, oil and gas, mining, and hospitality (hotels, restaurants, etc.).
- At least 80% of the company’s assets (by value) must be used in qualified business activities, and no more than 10% can be tied up in nonbusiness real estate.
- Asset Threshold Requirement
- Previously, a business’s assets couldn’t exceed $50 million.
- Under the OBBBA, the ceiling has increased to $75 million (with inflation adjustments after 2026) for stock issued after July 4, 2025.
If a corporation owns more than 50% of another company, the subsidiary’s assets count toward this limit. Growth above the ceiling after stock issuance does not disqualify QSBS.
Capital Gains Exclusions for QSBS
One of the biggest tax incentives of QSB stock is the capital gains exclusion:
- 50% exclusion for stock acquired before February 18, 2009 (and held for 5+ years).
- 75% exclusion for stock acquired between February 18, 2009, and September 27, 2010.
- 100% exclusion for stock acquired on or after September 28, 2010 (and held for 5+ years).
New Exclusions Under the OBBBA
For QSBS acquired after July 4, 2025, shorter holding periods qualify for partial exclusions:
- 75% exclusion if held for 4 years.
- 50% exclusion if held for 3 years.
If QSBS is gifted or inherited, the original holding period carries over to the recipient.
Important QSBS Rules to Know
- Original issuance only: Stock generally must be acquired directly from the company (or underwriter), not from another shareholder.
- Exclusion limits: You can exclude up to the greater of $10 million or 10 times your adjusted basis in the stock sold during the year.
- State taxes may apply: Not all states conform to federal QSBS exclusions, so check your local rules.
Additional QSBS Tax Planning Opportunities
- Rollover deferral: If you reinvest proceeds from the sale of QSBS into new QSBS within 60 days, you can defer gain recognition until the new stock is sold.
- Stock conversions: If QSB stock converts to another class of stock in the same company, the holding period carries over.
Should You Invest in QSBS?
QSBS can deliver major tax advantages, but it shouldn’t be the sole reason for investing. Always consider:
- Investment goals
- Risk tolerance
- Time horizon
Before purchasing QSBS, consult with a tax advisor to maximize benefits and avoid costly mistakes.
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