On July 4, 2025, President Trump signed the One Big Beautiful Bill Act into law, delivering major enhancements to the federal Qualified Small Business Stock (QSBS) regime under IRC §1202. These revisions expand the tax planning playbook for founders, early-stage investors, and pass-through businesses—especially in Texas, where the state’s no-income-tax advantage amplifies the impact of federal capital gains exclusions.
The changes apply only to QSBS acquired after July 4, 2025. QSBS acquired on or before that date remains subject to the legacy regime (i.e., 100% gain exclusion after a five-year hold, with a $10 million per-issuer cap). The new rules, however, offer meaningful flexibility for shorter holding periods, larger exclusions, and broader company eligibility.
QSBS 2.0: What’s New Under the Act
The following changes are now in effect for QSBS issued by a domestic C corporation and acquired on or after July 4, 2025:
Shorter Holding Periods, Tiered Exclusions
3-year hold: 50% exclusion
4-year hold: 75% exclusion
5-year hold: 100% exclusion
These partial exclusions are taxed at a preferential flat rate (28% base rate + 3.8% NIIT), resulting in effective federal rates of 15.9% (for 50% exclusion) and 7.95% (for 75% exclusion). Like before, all excluded gains remain exempt from the Alternative Minimum Tax (AMT).
Higher Gain Cap Per Issuer
The per-issuer gain exclusion cap increases from the greater of $10M or 10x basis to $15M or 10x basis (indexed for inflation beginning 2026).
Spouses filing jointly continue to split this exclusion equally (e.g., $7.5M each), and gains excluded in prior years reduce the available cap going forward.
Expanded Company Eligibility
The definition of a “Qualified Small Business” now applies to companies with aggregate gross assets of up to $75 million (up from $50 million), also indexed for inflation starting in 2026. This significantly expands the pool of Texas companies that can remain QSBS-eligible through later funding rounds.
Strategic Timing and Planning
With these reforms now in force, Texas-based companies should evaluate C-corp conversions not only for equity financing purposes, but as part of a long-term federal tax minimization strategy. Early-stage planning—particularly around stock issuance, valuation, and capitalization—is key.
Let’s Talk
The new QSBS rules may make the difference between a merely successful exit and a life-changing, tax-efficient one. Whether you’re a Texas founder or an international team targeting U.S. investors, Scale LLP can help assess the right structure to position your company—and your stakeholders—for a qualified win.
Ready to explore your options? We advise clients on startup structuring, C-corp conversions, investor tax strategy, and liquidity event planning. Contact us today.