QSBS Limits Raised

Summary

On June 16, 2025, the Senate Finance Committee released its own version of proposed legislation following the House’s passage of the “One Big Beautiful Bill Act” (H.R. 1). While the House bill did not introduce any changes to Section[1] 1202 for “qualified small business stock” (QSBS), the Senate Finance proposal introduces significant expansions of the tax benefits of QSBS acquired after the date of the enactment of the final legislation.Summary of Current LawThe QSBS exemption allows noncorporate founders and investors in certain emerging growth companies that are C corporations to exclude up to 100% of the gain upon the sale or exchange of QSBS. The amount of gain eligible for exclusion is limited to the greater of $10 million or 10 times the taxpayer’s tax basis in the QSBS (as determined under the QSBS rules) issued by such corporation.In order to qualify for the QSBS exclusion, (i) the stock must be acquired directly from the corporation at the time of its original issuance; (ii) the gross assets of the issuing corporation must not exceed $50 million at any time prior to or immediately after such issuance; (iii) the issuing corporation must satisfy the “active business” requirements during substantially all of the taxpayer’s holding period; and (iv) the taxpayer must hold the QSBS for more than five years.Proposed Changes Under the Senate Finance ProposalThe Senate Finance Committee proposes three key changes:Tiered-Gain Exclusion. The Senate Finance proposal would establish a tiered-gain exclusion for QSBS acquired after the date of enactment. There would be a 50% exclusion for QSBS held for at least three years (but less than four years), a 75% exclusion for QSBS held for at least four years (but less than five years), and a 100% exclusion for QSBS held for at least five years. QSBS gain is taxed at maximum capital gains rate of 28%, such that the effective US federal tax rate for QSBS under the Senate Finance proposal would be 15.9% (including the 3.8% Medi...