The One Big Beautiful Bill Act (OBBBA) introduced major updates to Qualified Small Business Stock (QSBS) under Internal Revenue Code Section 1202. If you hold or expect to receive startup equity, understanding how Sections 1202, 1045, and 83(b) work together can help you plan a tax-efficient exit and preserve eligibility for some of the most generous capital gain exclusions in the tax code.
What are the key QSBS changes under the OBBBA?
The OBBBA made three changes that materially expand QSBS: a tiered holding-period exclusion, a higher exclusion cap, and a higher gross-assets limit. Each is summarized below.
Holding Period for Exclusion
Old rule: 5 years required for 100% exclusion. New rule (stock acquired after July 4, 2025): 3 years = 50%, 4 years = 75%, 5+ years = 100% exclusion. Shorter holding periods now qualify for partial QSBS treatment, meaning you no longer need to wait the full five years to benefit.
Exclusion Cap
Old rule: $10 million or 10× your basis. New rule: $15 million or 10× your basis, adjusted annually for inflation. This means significantly greater potential for tax-free capital gain on a qualifying exit.
Aggregate Gross Assets Limit
Old rule: $50 million. New rule: $75 million. Startups can now grow substantially more before disqualifying under Section 1202, keeping the QSBS door open longer for later-stage investors and employees.
What do the QSBS changes mean for you?
If you sell before the full 5-year holding period, you can now exclude 50% of the gain at 3 years or 75% at 4 years, instead of receiving no benefit at all. This tiered structure aligns far better with the reality of early exits, M&A activity, and startup funding timelines.
The exclusion cap rising to $15 million (indexed for inflation) allows even more tax-free upside on a successful exit, and the $75 million gross-assets ceiling gives startups additional runway before new issuances lose QSBS eligibility. Because the gain is reported through capital-gain channels, coordinate the reporting on Form 8949 with your overall tax planning.
How does a Section 1045 rollover defer gain?
Section 1045 lets you defer gain on QSBS held more than six months by reinvesting the proceeds into another QSBS within 60 days of the sale. This is the primary tool for an early exit where you have not yet met the Section 1202 holding period but want to preserve the exclusion path.
Section 1045 Highlights:
- Applies to QSBS held for more than 6 months
- Requires reinvestment into new QSBS within 60 days
- Only applies to non-corporate taxpayers
- The original holding period tacks on to the new stock
- If the replacement stock is held long enough, you may still achieve full or partial gain exclusion under Section 1202
This is a powerful planning tool if you want liquidity but still aim to preserve QSBS treatment in the future. Timing is critical, so reinvestment windows and documentation must be carefully tracked.
How do you structure equity to maximize QSBS?
QSBS benefits depend entirely on getting the structure right from the start: original-issuance stock in a C corporation, issued while the company is under the gross-assets ceiling. If you are a founder, early employee, or investor, your equity can qualify for tax-free gains under Section 1202, but only if these conditions are met when the stock is issued.
How We Help:
- LLC to C Corp Planning: We help you understand the tax implications of starting as an LLC and identify the optimal timing to convert to a C Corporation to preserve QSBS eligibility.
- QSBS Eligibility Analysis: We work with your legal and corporate team to ensure your equity compensation and stock structure align with Section 1202 and 1045 requirements.
- Entity and Tax Compliance Support: We assist with documentation, valuation reviews, and tracking relevant QSBS criteria, including gross asset thresholds, stock grant timing, and original issuance.
How do you start the QSBS clock early with a Section 83(b) election?
A timely Section 83(b) election on restricted stock (or an early exercise of options) can start the QSBS holding period at grant rather than at vesting, shortening the path to the 3-, 4-, or 5-year exclusion tiers. If you are issuing or receiving stock options or restricted stock, the key steps are:
- Understanding the tax impact of early exercising stock options (see our equity compensation tax guide)
- Coordinating with your legal team to file accurate Section 83(b) elections within the 30-day window
- Modeling exit timelines to align with the 3-, 4-, or 5-year QSBS exclusion windows
What does it take to qualify and maximize QSBS?
The combination of Sections 1202, 1045, and 83(b) is one of the most powerful planning opportunities in the startup world, but the benefits only apply when the structure is correct. To qualify and maximize the exclusion, you must:
- Operate as a C corporation
- Stay under the $75 million gross-assets threshold at issuance
- Hold original-issue stock
- Time your equity grants and elections strategically
- Consider Section 1045 rollover opportunities if you exit early
Founders weighing an LLC-to-C-corporation conversion should also review our S corp vs LLC vs C corp comparison before deciding on a structure.
Have questions about QSBS and Section 1202 planning for your equity? Contact TS CPA for a free consultation. We respond within the same day.